Perhaps one of the most famous anecdotes related to market timing can be attributed to Baron Rothschild. In July 1870, Napoleon III, the nephew of Napoleon Bonaparte, threw France into a war with Prussia. The result was a disastrous for France. In September 1870 the Prussian army began the siege of Paris. After a massive bombardment of the city, on January 28, 1871, Paris surrendered and a new provisional government was formed. During the siege however, hundreds of thousands of Parisians became armed members of a citizen’s militia known as the “National Guard,” which held 400 cannons on the Butte Montmartre. The new government viewed this as a threat and ordered its own troops to seize the cannons. But instead, the government troops rebelled against the order and effectively joined forces with the National Guard. Fearfully, the govern-ment members fled to Versailles, leaving the Central Committee of the National Guard as the only effective government in Paris. In keeping with its democratic ideals, the Central Committee arranged for elections for a “Commune,” which took place on March 26th.

Soon thereafter however, government forces returned from Versailles and besieged the city. Their forces, enlarged by French POWs released by Prussia, pushed back the National Guard. The siege reached its climax during “La Semaine Sanglante,” or “The Bloody Week,” in May 1871, when as many as 30,000 people were reportedly executed or killed in fighting. It was at that time that a young man, who had just received a large inheritance, called on the great banking firm of Rothschild to ask their advice on how best to invest his fortune. Here’s a recounting of the story as published in a 1917 edition of The Gas Record:

In 1871 when the Commune in Paris was at its height and the streets were red with blood, a young man called on the great banking firm of Rothschild to ask advice about a large fortune to which he had become heir. The head of the house told him to buy French Government Securities. “What: buy securities when the streets of Paris are running with blood!” was the young man’s surprised exclamation. Baron Rothschild is re¬ported to have said: “My young friend, that is the very reason that today you can buy securities for 50% of their face value.”

This led to the oft-quoted adage “Buy when there’s blood in the street.” Investment opportunities are presented to you at exactly the time you are least emotionally prepared to accept them. That is precisely why they exist.

“The World’s Greatest Investor” (the phrase often used when referring to Warren Buffet), is a market timer. Buffet’s company, Berkshire Hathaway, held $47 billion dollars, a full 28% of its market capitalization, in cash at the U.S. stock market peak in the fall of 2007. This was the most cash ever held by Berkshire Hathaway and turned out to have been a great time to have been in cash, as stock prices fell by more than 50% over the ensuing 18 months. Rather than increasing his stock positions at unattractive prices he engaged in market timing by making the decision to hold a large cash position.

Conversely, as stocks began to collapse during the financial crisis of 2008, Buffet began to buy. First he picked up a distressed position in both Goldman Sachs and General Electric. In late 2009 he capped off his buying spree with a purchase of the remaining shares in Burlington Northern Santa Fe railroad that he didn’t already own. At a price of $44 billion, this was, by far, the largest purchase Buffet’s company had ever made.

Buffet knows and uses what you learned in Myth #1 – Stocks Provide an Intrinsic Return – short-term stock prices are driven primarily by people following their emotional weather vane. When they are depressed about corporate prospects, as they were during the 2008 financial crisis, they drive the prices of stocks straight down.

Warren Buffet is a “value investor” only because people, through their knee-jerk buying and selling patterns, consistently provide him with the perfect opportunity to be one.

Perversely, the recognition of this short-term behavior leads to Buffet’s reputation as a long-term investor. Once he’s made his opportunistic purchase, Buffet holds many of his stock posi-tions for long periods of time. He is capturing the benefit of corporate growth, which dominates stock prices over long periods of time. He is hand-picking individual stocks. Not the market. He is interested in reaping the benefits of selecting strong, well-managed companies and being rewarded in higher stock prices for their individual corporate performance.

Stocks aren’t the only financial instrument Warren Buffet market times. As Mr. Buffet succinctly describes in his 2007 letter to shareholders of Berkshire,

The U.S. dollar weakened further in 2007 against major currencies, and it’s no mystery why: Americans are a lot more excited about buying products made elsewhere than the rest of the world is about buying products made in the U.S. Inevitably, that causes America to ship about $2 billion of IOUs and assets daily to the rest of the world. And over time, that puts pressure on the dollar.

And a few paragraphs later he describes a long position he entered into in the Brazilian currency, the “real,” as a way to time the direction of the U.S. dollar:

At Berkshire we held only one direct currency position during 2007. That was in – hold your breath – the Brazilian real. Not long ago, swapping dollars for reals would have been unthinkable. After all, during the past century five versions of Brazilian currency have, in effect, turned into confetti. As has been true in many countries whose currencies have periodi¬cally withered and died, wealthy Brazilians sometimes stashed large sums in the U.S. to preserve their wealth. But any Brazilian who followed this apparently prudent course would have lost half his net worth over the past five years. Here’s the year-by-year record (indexed) of the real versus the dollar from the end of 2002 to year-end 2007: 100; 122; 133; 152; 166; 199. Every year the real went up and the dollar fell. Moreover, during much of this period the Brazilian govern¬ment was actually holding down the value of the real and supporting our currency by buying dollars in the market.

Not only does Mr. Buffet reveal that he is a market timer, but that he is timing a currency which as a market has proven to be the antithesis of buy-and-hold. As he acknowledges, “during the past century five versions of Brazilian currency have, in effect, turned into confetti.” As discussed in Myth #1 – Stocks Provide an Intrinsic Return, and clearly understood by Mr. Buffet, the past performance of a market is virtually irrelevant when considering whether to buy or sell it today. All that mat-ters is whether the return drivers for that market today warrant a buy or sell decision.

“Sure,” you say. “It’s easy for The World’s Greatest Investor to successfully time the market. That’s why he’s The World’s Greatest Investor. But what about me?” The answer is: you can – precisely because most people can’t.

It appears that people are hard-wired for investment failure. Because of that it is easier for financial professionals to instruct their clients to buy-and-hold rather than attempt to time the market, simply because most people will time the market incorrectly. But you don’t have to be one of those people. You can exploit their behavior.

4. In the debate over "good debt" and "bad debt", author David Bach says there's no such thing as good debt. While I wouldn't go that far (I would say borrowing for short periods of time for a house and/or education is acceptable), I generally agree with the spirit of his thoughts -- that debt is a killer.

5. These are some of the reasons why we have been debt free for 15 years now. And yes, that includes our mortgage. Imagine what your finances would look like if you had absolutely no debt. Pretty great, huh? I can tell you from personal experience, it IS pretty great. :)

1. Does anyone really title their resume as "resume" or "job history"? Yikes!

2. Personal information on a resume can lead to ID theft. And a photo screams "amateur" unless you're in a field like acting or modeling where it's a generally accepted practice.

3. I agree that you don't necessarily want to use the template that your word processing program offers. That said, I do prefer a more traditional layout, so perhaps that could be considered as "stock."

4. I hate objectives too. Waste of PRIME space (at the head of your resume.) Employers know what your objective is -- it's to get a job with them. After that, they don't really care for the most part.

5. US News doesn't like to use months of employment like "May 2006 to June 2008." They prefer simply "2006 to 2008." I actually prefer the former since it gives more detail/perspective.

6. DO NOT waste space. Your resume space is limited as it is, so you don't want to include anything that doesn't help "sell" you as an employee.

7. Same comment as #1. Really?

8. I would only include hobbies if they applied to the job. For instance, if you had a marketing blog that was highly respected in the industry and you were applying for a marketing position, I would include it. Why? Because it helps "sell" you as an employee.

9. Yes! Don't take any sort of stance on anything controversial!

10. Everyone in the world knows/assumes that references are available upon request. Saying it wastes selling space and makes you look like an amateur.

What do you think of this list? Do you see any they missed or any of my responses you'd change?

April 27, 2012

The following is the latest post in my "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.

If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going.

Next in the series is FMF reader CP. He answered my questions (in red below) as follows:

Please tell us a bit about yourself.

I am 43 years old and a physician. My wife is a part time physician. We have two children in elementary school. As a surgical specialist I began earning income later in life, as compared to my peers. After completing medical school I trained for 6 years to become a surgeon; and then spent an additional year in a fellowship program. My wife trained for 4 years to become a specialist and then an additional year in a fellowship program. We moved to 5 different states, training to become doctors, before finally settling in the Midwest – which is home for both of us.

Describe your financial situation.

I work full time as a partner in a surgical group. My income is approximately $400,000/year. My wife works part time and her income is approximately $100,000/year. Our monthly net after taxes is approximately $25,0000. We use automated deductions from our bank account for most things.

We just paid off our house. That will free up some cash for expected increases in private school tuition, extra money towards retirement and, more towards charity. Tuition will double by the time kids reach middle school. My wife and I debate, daily, the value of private school since we are both a product of public schools. We consider moving into a leafier part of town. But, I am not sure it is a wise move given the projected cuts in health care in the near future.

What are your plans for the future (retire early, build your career, etc.)?

By the time both kids are well into college, my wife and I are interested in a change of some sort. We both enjoy what we do so I doubt we will retire early. We may get out of the grind of private practice and settle to a more leisurely pace in a warmer climate.

I would like to spend more time working with the underpriviledged. Currently, I spend one week a year on mission trips to 3rd world countries to serve - by way of operating on the needy. I would like to spend 4 weeks a year on mission trips. If the climate to work with the underpriviledged in the US become easier (malpractice issues, etc.) I would like to use my skills to serve that population more.

With regard to the nitty gritty of personal finance, I do not use a financial advisor. I invest in value index funds and high yield municipal bond funds. I have a handful of funds that I use. Dollar cost averaging is my friend. When certain funds are down in value because of a crisis in certain geographical regions or what pundits on wall street say I allocate more money to those funds and less to the overvalued funds. I use the P/E 10 ratio of stock funds and the yield vs coupon on bond funds to get a sense of their valuation. I occasionally gamble in a strong dividend/low pe/large market cap stock (and I realize it’s a gamble). I learned (and keep on learning) that I have a very poor sense of when to sell. So I just focus on buying cheap and holding.

Much of what I learned early about personal finance came from the book “The Millionaire Next Door.” I enjoy reading books on conservative approaches to investing. Free Money Finance has been an excellent blog to make sure that I am keeping in line.

The rest of personal finance education came from reading scripture and understanding the philosophy of Positive Psychology. I believe happiness comes from not what you buy or own, but, rather from experiences – especially with those you love for the sake of others.

I am fortunate to have been blessed with parents that provided me good education and solid values to hold on to. I hope to pay it forward.

Google your name and/or find any traces of you on the Internet. Determine if damage control is needed. Correct if you can.

Use your resume to develop your LinkedIn profile.

Develop a keyword-rich LinkedIn profile.

Use “Internet crumbs” to your advantage. Include your job title and place of work, and a Web-based e-mail address in all places where your name will show up on the Internet, conferences, professional directories, associations, sports event participation, and so forth.

Export your network contact lists from LinkedIn, Facebook, and so forth, and contact them through e-mail with compelling information/content.

Set up a professional blog on your iResumePro Website. Tell the world what your SCA is by blogging.

Set up your YouTube channel and post your resume video. Also post your iVideoResumePro on your Website without a YouTube link, because some employers do not have access to YouTube at work.

Consider using TubeMogul to distribute your videos across different sites and increase your search engine findability.

Join Web-based communities relevant to your profession or the job you are interested in and become an active commenter or poster (not a pest).

At a minimum, every professional must attain a Level 1 ProfessionaliBrand. You reach the irresistible level once you complete Level 2. Do not be surprised if you begin to get offers before you complete Level 2.

I identify an additional level that is beyond the scope of this book as Level 3. It is what I call the Key Opinion Leader. If you would like to find out more go to www.transitiontohired.com. Of course there are many more initiatives at each level you can take because new sites and tools are mushrooming every day. Evaluate and use those that offer advantages to your ProfessionaliBranding strategy.

My husband and I are both in our late 20s. He has a masters in business and is currently working on getting his CPA. I work as an engineer. Together we make over $120K a year.

We have no school loans, credit card or car loans. We are very aggressive in our savings for retirement and between mutual funds and 401K have over $200K saved up that we never plan on touching until we are ready for retirement.

My question is we are looking to upgrade our house. Some good deals can be found in our area (Midwest) and we have owned our home for 5 years. It’s valued at ~130K and we have about $80K left on the mortgage.Since we are (God willing) planning on starting a family in the next 2-3 years, what is realistic price range for buying a home? What should be the max range we are willing to spend? I don’t need a lavish 4,000 square foot house or anything. What size home is good for a hopefully large family? I grew up sharing a room, so kids are OK to bunk together.

How do people plan out their mortgage, knowing that kids are down the road and potentially my income could stop to raise a family? Although we could probably afford a down payment on a large house now, how will the upkeep and taxes change on a single income? When your readers were raising a family did you drastically change the amount you put away each month? Any advice would be helpful.

A stock's valuation is the final factor of the Fama-French three-factor model of investment returns.

A stock's valuation is measured on a continuum from "value" to "growth." In broad strokes, value stocks are cheap and growth stocks are expensive. But there are compelling reasons why an investor might be willing to pay more for a growth stock than a value stock.

Consider a local utility company whose stock is selling for $10 a share. The price has not changed much in the past 20 years. The company only services a specific geographic area that is not experiencing population growth. It has also had consistent earnings each year and paid the entire amount to shareholders at $1 per share.

This company has a price per earnings (P/E) ratio of 10. If you were to buy a share of this company, it would take 10 years to get paid back in earnings. After a decade you would have been paid back the price of your purchase and still own your share of stock. This type of stock is considered a value stock.

In contrast, consider a technology startup company that has shown meteoric growth in the past three years. Annual company earnings were $0.25. Then they doubled to $0.50, and now they are $1 per share. The business has just entered into several synergistic deals with other companies that should vastly increase its market penetration. Expectations are for the earnings to continue to double for the next three years.

Investors might rightly decide that the growing technology company is worth more than the static regional utility. If earnings grow to $2, then $4 and then $8, this technology company might be worth $80 a share instead of just $10. If so, the current P/E ratio of this stock would be 80. This type of stock is considered a growth stock.

The P/E ratio is one common measurement used to place stocks on the value to growth continuum. Low P/E ratios are value and high P/E ratios are growth. When computing P/E ratios, the price (P) is easy to compute. Price is the share price on the stock market exchange throughout the day. Calculating earnings, however, is a little more difficult.

Some measurements use the past four quarters of earnings, which is often called the trailing P/E ratio. A projected or forward P/E uses the analyst consensus of the next four quarters' worth of earnings. For companies whose earnings are in flux, these two numbers can be very different.

Additionally, during hard economic times a company's earnings can decrease significantly or even disappear entirely. When earnings go to zero or turn negative, the P/E ratio ceases to make sense.

For these reasons a more common way to place a stock on the value-to-growth scale is the price-to-book ratio. Book value is the value shareholders would theoretically receive if a company was liquidated and all of its assets sold. Using book value ensures that you have some positive number and you won't be dividing by zero.

Many other metrics are used to analyze the value or growth attributes of a stock. These include price per cash flow, cash flow growth, price per sales, sales growth, book value growth and dividend yield. Each metric is simply trying to measure a future return on your investment.

Value and growth stocks react differently to new information. If the local utility company has some additional capital projects one year and only manages to pay $0.80 in dividends, it might not even change the stock's price. Value stocks are more resilient in flat or down markets. Not so with growth stocks.

If the technology startup's earnings grow from $1.00 to $1.80 the next year, the stock's price might tumble 27% from $80 per share down to $58 a share. The company's phenomenal track record of growth would be broken, and a more realistic valuation would be given to the company on account of lowered expectations.

Investors would wonder if instead of doubling earnings from $1 to $2 to $4 to $8, the company might only experience an 80% growth each year. That would mean earnings would grow from $1 to $1.80 to $3.24 to $5.83. As a result the stock might immediately drop 27% from $80 per share down to $58 per share.

Many investors find it baffling that a company could grow their earnings by 80% and the stock would drop 27% as a result. But everything is based on the expectation that the company would grow by 100% each year for the next three years. That expectation was already factored into the share price.

On average, value beats growth. The analysis that Eugene Fama presented during our conference last fall analyzed returns of the U.S. markets from 1927 through 2010. Rather than the price-to-book ratio, he used the book-to-price ratio. Because price is the market price, this is commonly called the book-to-market (BtM) ratio. When the BtM is high, a stock is a value stock. And when it is low, a stock is a growth stock.

Fama analyzed each decile from the lowest 10% of the BtM growth stocks through the highest 10% of the value stocks. The results were remarkable.

The average return of the lowest BtM decile was 10.99%, and the highest decile was 17.32%. There was a continuum such that except for a few, each more valuable decile showed a higher average return. The average return for the top 30% value was 16.30%, a full 4.80% higher than the bottom 30% growth's 11.50%. The neutral 40% in the middle averaged 12.91%.

Most major indexes are split between the value half and the growth half. The S&P 500 has an S&P 500 value and an S&P 500 growth. Similarly, the Russell 1000 Large Cap and the Russell 2000 Small Cap have subindexes for the value and growth side of each.

In my own analysis I measured the returns of the Russell 1000 Value against the Russell 1000 Growth from 1979 through the end of February 2012. During that period, large-cap value returned 13.27% versus growth's 12.47%, a premium of 0.80%.

The difference in small cap was much greater. The Russell 2000 Small Cap Value returned 15.07% versus Small Cap Growth's 12.44% for a premium of 2.63%.

In future articles we will explore how the value premium is higher for small cap than it is for large cap. The landscape of investment returns gets more complex with just the two dimensions of size and value. We begin to see that expected returns do not fit our simple linear formula. Rather they follow a curve.

Adding size and value as factors in our capital asset pricing model shows us certain truths about the markets. Many people follow the Dow and invest like the S&P 500, but tilting small and value provides a better return on average. And while large-cap growth technology companies got all the headlines and captured everyone's attention during the last half of the 1990s, there is quiet money to be made by growing rich slowly with value stocks.

The resume is not a story about your responsibilities or duties. It is not just a job description. It is about the facts: What did you do? What did you accomplish? In today’s job market competencies supported by accomplishments are the focus. Simply listing a bunch of competencies on a resume without any supporting accomplishments just does not cut it.

An accomplishment is defined using metrics, such as dollars, percentages, and time saved. For the most puritan competency evangelists, if an accomplishment can’t be measured it does not exist.

Usually the words and keywords that will get your resume selected by the HR software are related to the job-specific competencies—the functional parts of your job—and, as previously stated, sometimes these are still represented under headings such as technical skills and qualifications.

In order to get an interview you need to impress a person. You impress a person with your accomplishments.

It is also good to know that this work will help you with interviews because in a competency-based interview system the key selection factor is how well you can demonstrate or prove your competencies with supporting accomplishments.

Use the following structure when formulating your accomplishment state¬ments or bullet points. The result is impactful.

PAR

Problem: What was the problem (situation)?

Action: What action did you take?

Result: What was the result?

You can vary this approach. If you want to grab the employer’s attention, state the result first and use the Results-Action-Problem (RAP) format.

Examples:

Delivered an 80% ROI on new memberships by hiring an independent telephone marketing company to reverse declining memberships and increase membership growth. Marketing drive increased paid memberships from 200 to 533 within 3 months of taking leadership of the department—setting a company record. Note: The accomplishment statement above could be used to demonstrate the following competencies: initiative, results orientation, and problem-solving. Note: Begin each accomplishment statement with an action verb and make sure it is a powerful action verb.

Write a list of accomplishment statements related to each job you have had. Jot them down for now and make a comprehensive list. Make sure that you quantify the accomplishment using dollars, percentages, and time.

Bringing it All Together: Writing Your Masterpiece

Your resume needs to answer the following:

1. What is your Sustainable Competitive Advantage over your competition?

i. Remember it encompasses everything: information you have gathered, understanding of cultures, languages, challenges, activities, places, ideas, and anything else you can think of that may be remotely valuable. It includes special knowledge of industries, competitive knowledge, product positioning, ability to call on your network for help, ability as a speaker, presenter, or trainer.

ii. Education and training: consider all that is relevant to the dream job you seek.

3. What accomplishments have you achieved that will prove that you have the right stuff for the job?

a. In answering this question, consider PAR. We are not talking about golf here but rather Problem-Action-Results. What problems have you been given or have you identified? What action did you take? What were the results? You need to quan-tify these results where possible.

4. What have you done with respect to influencing the bottom line?

a. Consider that everyone is hired in a business to do one of three things: to make money, to save money, or to do both for their employer. You need to point out what, where, and how you have done this. Again, you need to quantify these results.

5. What is your work history?

a. Dates: include month and year. b. Employer: name and one-line description about the company or division if not well known. c. Job Title: Make sure you use a universally recognized job title, not something obtuse such as “talent acquisition” (instead use “recruiter”).

The following is the latest post in my "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.

If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going.

Next in the series is FMF reader EC. He answered my questions (in red below) as follows:

Please tell us a bit about yourself.

I am a married 41-year-old. My wife and I have been married for 12 years and are childless by choice. We are both professionals; I work for an Internet company, while she is a counselor.

When I was in my twenties and single, my financial life was a mess: I had a lot of credit card debt, leased a sports car, and wasted a lot of money on CDs, among other stupid decisions. I ended up on credit counseling and paid a lot in interest. Thanks in great part to my wife’s discipline, I’ve come very far in terms of my financial discipline, to a point where now I’m almost a miser in certain areas.

We bought our home right at the top of the housing bubble, spring of 2007, and can say that we regret the timing of the purchase (though I was skeptical of the whole home ownership thing to begin with). We bought our home for $450K and is now worth $310K.

We are both minimalists in terms of possessions, and thus do not have much of the more common expenses that most folks have, such as cable, furniture, cell phones, clothes, books, etc. Most of our entertainment comes free from the library or the internet. The one car we have is an older 2001 model which is fully paid off, and we barely drive it, as both of our jobs are convenient to bus commuting. Our only vice, if you will, is traveling. We go on two to three international and domestic trips per year.

Describe your financial situation.

Our gross combined annual income is little more than $138,000, which comes to about a $9,000 net income per month (after my 401k). Our monthly expenses break out as follows:

Mortgage: $2,300 (incl prop taxes, insurance)

Car insurance (old, ugly, but dependable car): $28

Utilities/gasoline: $200

Food (eating out, coffee, & groceries): $700

Parents: $500

Other Expenses (travel, clothes, entertainment, etc): $1,000. This average masks the skewed distribution of this line item. That is, we can go months without such expenses, and then take a big trip and/or buy a few clothes, etc.

Total Monthly Expenses: $4,728

Total Monthly Savings: $4,272

So, we are able to save close to half of our net income.

On the asset front, our liquid savings total $55,000 (split evenly between a total stock market fund and a money fund). My 401k balance is $72,000 and my Roth IRA is $33,000 (my wife doesn’t contribute to any retirement plans). I save only 4% to my 401K since that’s the level at which my company will match. I save the max in my Roth IRA.

The only debt we have is our mortgage, with a balance of $222K @ 5.375%.

What are the current financial issues you’re facing?

I am currently OBSESSED with getting rid of our mortgage, seeing that half of our savings is not making much money sitting in a money market fund. In fact, once a year or so, I am in the habit of sending a big lump sum payment to our mortgage principal. That’s why our savings balance may not reflect our high savings rate. I’m not too crazy about increasing our exposure to the stock market, it’s high enough as it is, including retirement accounts. Plus I figure I’m getting 5.375% back by paying down the mortgage, instead of the measly 1% from the money market fund (if that!).

A second issue that’s come up in the past few years is taxes. Besides increasing the 401K contribution rates and perhaps having my wife start contributing to her organization’s 403b, I just can’t think of any good ways of lowering our tax bill. The past couple of years we’ve ended up paying taxes at time of filing, when we used to get a small refund. We don’t pay a whole lot, but the trend is a bit worrisome.

Lastly, I do admit that most of our food expenses are from eating out, and it’s something we need to control.

What are your plans for the future?

We currently live a relatively high cost of living area. We’re both in our early forties and by our early fifties would like to bring our savings to a level that allows us to downgrade our salaries a bit. I honestly hate my job but love the pay. We envision moving to a cheaper area, where we’ll be able to find jobs that are more interesting to us, even if they pay considerably less. One possibility we’ve also talked about is serving in the Peace Corps.

My obsession with paying down the mortgage is precisely so that we won’t have a mortgage to worry about in 5-6 years and which will open more options for us. I have to admit I was never sold on this home ownership “dream” that is so prevalent. I may be naïve, but I’m just waiting for our home value to go up to what we paid for it (or close), and sell it to get some of the money we’ve sunk into it, and add it back to our savings.

Given we’ve traveled quite a bit, beginning this year we’re talking about paring down our traveling in order to save more that moment when we can downgrade our lives.

What’s your best piece of financial advice?

My financial motto could be summarized as “save where you don't want, so you can spend where you want”. I have to admit the phrasing is not original, I’ve seen it in other financial blogs, but it’s the way I’ve lived since my mid-thirties. I suggest folks question everything they spend money on, and decide what they can truly live without. For example, question whether you need that second car, or that new jacket, or a cell phone, or cable, etc. I’m talking about big monthly expenses. At the need of that decision tree, you won’t have to waste time couponing, tracking down this-or-that deal, or switching credit cards to get a few more miles. Focus and spend money on those few things that matter more to you, that represent the most satisfaction, and that you don’t mind splurging on from time to time: You’re saving money in the long run.

I have been in a purchasing/production management capacity for the past 5 years (my entire career is 8 years). I recently took a new production management position last year but I believe that my specific skill set, in commercial printing, will become relatively obsolete in my lifetime due to the digitization of print literature. So, while I am early in my career I would like to expand my skill set to allow me to work in various fields. I am looking to obtain my CAPM (Certified Associate in Project Management) and then on to my CPIM (certified Professional in Inventory Management). I believe that this investment of ~$2K to get the certificates will have a greater return on my career than just hard work alone.

I believe that the CAPM will allow me to further develop project methodologies and show potential employees that I can work on sound principals to work through projects, and the CPIM will help me develop better purchasing principals, supply chain understanding, etc.

My goal would be to land a supply chain position or some high level procurement position within a number of years (or right now!)

My question is, is it worth it? Are these certificates what I need? Are there others I should consider?

April 24, 2012

We can see that if a person had held stocks over the 111 year pe-riod ending December 31, 2010 and reinvested all dividends, they would have achieved a return of 9.5% before inflation. But the average person’s life expectancy is in the range of 80 years. If you consider that the last 15 or so of those years are the pe¬riod when they will be spending their savings, then that leaves about 45 years to accumulate and invest their earnings (from the ages of 20 to 65). So when considering implementing buy-and-hold as an investment strategy, the first important question to ask yourself is “what length of time should I plan on holding the position?” The answer is “probably much longer than most people can wait.”

Figure 5 illustrates the real (inflation-adjusted) growth in an initial $100 placed into a basket of U.S. stock at the start of 1900, assuming dividends are spent and not reinvested. That will undoubtedly rock the world of people who have been told, as long as they’ve been alive, that stocks work best in the long-run. The most interesting observation here is that it took until 1950 before the value of the initial $100 exceeded and stayed above that $100 value.

Growth of $100 Placed into U.S. Stocks in 1990: Real Returns – Without Dividends

Figure 5 (Click to enlarge)

That means that for more than 50 years any person who placed $100 into a broad basket of U.S. stocks, and who did not reinvest his or her dividends, would have suffered a loss, al-lowing for inflation. That really does give new meaning to the term “long run.”

Perhaps most troubling though is the following fact:

All of the real stock market returns earned over the past 110 years can be attributed to just an 18 year period – the great bull market that began in August 1982 and ended in August 2000. Without those years the real, inflation-adjusted return of stocks, without reinvesting dividends, was negative.

This points out the greatest risk of the buy-and-hold strat-egy, which is that stock market returns are extremely “lumpy.”

Secular bulls and bears

Let’s look at real returns without reinvesting dividends. Over the past 111 years, the U.S. stock market experienced four secular bear markets and three confirmed secular bull markets (it is not yet clear whether we are still in the bear market that began in 2000 or have entered into the fourth bull market). Each bear market averaged just less than ten years from the prior peak to the bear market low and suffered an average loss of 68%. On average it took the market 14 years to recover from each loss and the market continued to rise for another six years subsequent to recovering the ground lost in the bear market. This means that for 82 years the market was either in a bear market or recovering from one. It spent 27 years breaking into new high ground.

These figures aren’t as bad as they first appear. First, they are the “real” return from stocks. So this is what your money would have grown to, even after reducing its value for inflation. Second, these figures represent only gains from the rise in stock prices and do not include the benefit of reinvesting dividends. Unfortunately though, a lot of people do not reinvest their earned dividends, or as was the case of the growth stock market of the late 1990s, do not put money into high dividend stocks. As a result they miss out on what, over time, becomes the greatest source for potential stock market returns…dividends. Finally, for people who hold stocks, recovering from a bear market is still good, it means that money is being made (although if they were also invested during the bear market they are merely recovering past losses). So the fact that, on average, 14 years was spent recovering from each bear market still means that the market was going up. If you were astute enough to miss the bear, every year of recovery would have put you into new high ground. Figure 6 lists the secular bull and bear markets since 1900.

Secular Bull and Bear Markets 1900 - 2010

Figure 6 (Click to enlarge)

The average person can easily examine stock market history and feel confident that he or she would have the discipline and perseverance to hold through significant declines of this magnitude. But over the past decade, the investing public has proven otherwise. An average secular bear market length of ten years requires a person to sustain a vigilant, faith-like adherence to the policy of buy-and-hold.

Figure 7 overlays the market P/E ratio at the time of each se¬cular peak and trough. What is obvious from the chart is that the P/E ratio (the price people were willing to pay for earnings) peaked at each market peak and bottomed out at each market trough. What is also evident from the chart is that each of the prior three secular bear markets bottomed with the P/E ratio settling in the single digits. At the market bottom in March 2009 the P/E dropped only to as low as 13.

Growth of $100 Overlaid with P/E Ratio

Figure 7 (Click to enlarge)

What does this information mean to a person committed to buy-and-hold? It means that if their timeframe is less than 20 years, they may be taking on the significant risk that their money in stocks will be worth less at the end of that period than at the beginning. And, as we learned in Myth #1 – Stocks Provide an Intrinsic Return, their returns over that period are more dependent on the whims of other people as reflected in the P/E ratio than on the performance of the stocks of the individual companies in which they place their money.

Interestingly, bear markets are not caused solely as a re-sult of economic contraction, but are instead driven pri-marily as a re¬sult of changes in the multiple that people are willing to pay to own stocks.

Now – why buy-and-hold is wrong

So much for history. Now I will explain why all of that is meaningless.

First, virtually every part of buy-and-hold data was created with the benefit of hindsight. I’ve often joked how much fun investing would be if we could invest in the “Hindsight Fund,” where we decide today where we would have placed our money last week or last year and then get the credit for that. That’s what all the buy-and-hold studies are. Of course, every study is based on retrospective analysis, which may have little to no bearing on real-time action or reaction. Announcing what would have or could have happened, after the fact, with any particular market pick is simply a basis for mildly interesting conversation. It is not a revelation. It is simply an observation.

In 1900 there were more than 100 recognized countries, or sovereign nations, existing across the globe. And, according to Steven T. Brown, William N. Goetzmann and Stephen A. Ross in “Survival,” “there is historical evidence of at least thirty-six (stock) exchanges extant at the beginning of the (20th) century.”

How many reports have you seen issued extolling the bene-fits of buying-and-holding stocks for the past century in The Netherlands, Germany, Belgium, Hungary, Argentina, Egypt, Denmark, Hong Kong, Turkey, Portugal, Spain, Mexico, Russia, Brazil, Chile, Korea, Japan, Austria and Poland? The answer? …None. And that’s for one simple reason. All of those countries had stock exchanges at the beginning of the 1900s and all of them provided opportunities for people to buy stock for the long run, but all of them suffered major interruptions in their activity due to nationalizations or war. None of them out-performed the returns a person would have made if, instead, they had put their money into U.S. stocks. In fact, out of the remaining countries that did not suffer interruptions in their trading, the inflation-adjusted stock market performance of only three of them, South Africa, Australia and Sweden, out-performed the United States. Investing in stocks in the U.S., South Africa, Australia and Sweden beat all those other countries during the 20th century.

Here’s why: The baseline conditions in those other countries changed, sometimes multiple times, during the 20th century. Many people were wiped out or had the money they placed in those markets substantially destroyed. In fact, as stated by Brown, Goetzmann and Ross in “Survival,” “more than half (of the markets that existed in 1900) suffered at least one major hiatus in trading.” The reason there aren’t a multitude of books using historical performance to promote the buy-and-hold strategy in all those other countries is because it didn’t work in those countries. Or at least it didn’t work as well in those countries as it did in the U.S. The focus on the out-performing U.S. market is called selection bias. It is sufficiently damaging, all by itself, to be the reason not to rely on buy-and-hold as a strategy.

Think about that. All the studies showing the value of buy-ing-and-holding U.S. stocks have one thing in common; they all had the benefit of hindsight. It did pay to buy stocks in the U.S. in 1900, when the U.S. was an emerging economy, and hold on as stocks rose in price over the past 111 years. But that’s not a good reason to buy stocks today. Baseline conditions change. The conditions which existed in the U.S. in 1990 are different from those which exist today. Merely relying on historical repetition is not a sufficient return driver.

The following is the latest post in my "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.

If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going.

Next in the series is FMF reader JM. He answered my questions (in red below) as follows:

Please tell us a bit about yourself.

My wife and I are both 27 years old and have been married about year and a half. We both work at the same company in the Southeast, a large engineering and construction firm where I am a mechanical engineer, and she is in procurement. The industries we work in are very cyclical, so that has made our job situation feel very unstable at times during the recent down economy. Fortunately, we have both been able to weather the storm so far, and it has probably been beneficial as it helped us stay prepared for a rainy day and strengthened our saving habits.

Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).

We are both very fortunate to be in the situation we are in at a fairly young age. First and foremost, both of us graduated college 4-5 years ago with no debt thanks to very generous parents which helped put us both ahead of the game. After school we both got what I would consider good paying jobs at the same company we currently work for and immediately started putting away money. Our base gross salary is about 134k a year, and we earn a little overtime that amounts to about 3-5k extra on average. We manage to put away just about 50% of our gross income split over our retirement accounts and regular savings and investment accounts.

Our monthly expenses are about as follows:

Mortgage - $750

Gas - $300

Cell Phones - $140

Food - $600 (a bit expensive for two people but it's something we splurge a bit on)

Insurance - $120

Utilities - $160

Medical Stuff - $200

Other - $350-$1350 (ranges greatly, usually on the higher end if we have to buy gifts, take a small trip, do a house project, etc.)

As you can see, our total expenses are in the $2,600-$3,700 ballpark. We don't really maintain a strict budget, just make sure we check our balances every couple days to see where we are for the month.

When all is said and done our net worth is about $400,000, which is much better than we thought we would be doing at our age.

What are the current financial issues you're facing (saving, paying off debt, etc.)?

Overall, I think we are definitely on the right track. The biggest issue now is staying the course and investing our excess take home pay wisely. Our cash balance is fairly healthy, and I'm sure some may be quick to point out that we could pay down our mortgages quite a bit. This is something we are beginning to do with our excess take home pay rather than adding to our cash balance, however for the time being it is very comforting to know that we have the cash available for an opportunity that may present itself while our mortgage payments and interest rates our very low. That said, we do not want to carry debt for our whole life, so paying down the relatively modest and safe debt we do have while maintaining a "war chest" to go after some opportunities is very important to us for peace of mind.

What are your plans for the future (retire early, build your career, etc.)?

Other than saving as much as we can to have as many options as possible, we don't have any concrete long term goals. We both like our jobs (most days) and can imagine being there for the foreseeable future. Having a healthy level of savings will give us the option of continuing working, starting a small business, or investing in a franchise or more property in the future. I don't see myself wanting to fully retire too early, but I can definitely see leaving the corporate world at some point to pursue some entrepreneurial interests, and having this option sooner rather than later is important.

"All that glitters is not gold." I believe this is misquoted or derived from Shakespeare but I think it is a great philosophy to live by in today's world of consuming beyond your means, as it reminds you that appearances are not always what they seem. I also particularly like one quote by Warren Buffet, "You only find out who is swimming naked when the tide goes out." This is a great reminder to be conservative, be educated, and be prepared for whatever life may throw at you as you want to be the one with the bathing suit on.

Even simpler than those though, my own little philosphy is that it's not what you make, it's what you keep. There are countless examples of people with huge incomes that don't have a clue what to do with it. The best tip is to make the gap between your income and expenses as big as possible and invest the difference wisely and steadily.

If you read a handful of books (or read a few money sites or listen to a few financial radio shows) by today’s popular financial gurus, and you will begin to notice the same advice being given over and over again. The advice is designed for the masses and meant to offer general guidelines that work for most people. Yet, have you ever stopped to think whether the directions being given is actually good advice? Here's my take on some of the most comment money suggestions given today:

Save 10% of your income. This is a good beginning point IMO. The 10-10-80 budget, which is what I consider to be a good guideline for those just starting to manage their finances, lists 10% savings as the goal. That said, the budget also assumes that the "10s" (saving and giving) will get larger over time and the "80" (spending will get smaller.) So for those just starting out, saving 10% of your income is good advice. But for those five years down the road or so there needs to be some progress to get that 10% moving up.

Borrowing for good debt is okay (defining "good debt" as debt that allows you to ultimately earn more than the cost of the debt -- generally thought of as student loans and a mortgage.) I'm willing to concede that this is at least fair advice if done within reason. By "within reason" I mean that college debt needs to be aligned with expected post-graduate earnings and a mortgage needs to be taken out on a house you can afford. Furthermore, I prefer that people take out “good” debt for as little time as possible. After all, debt, even good debt, is debt, which hurts cash flow and financial growth. This is why I paid off all my debt 15 years ago.

Buy life insurance worth 10x your income. Not good advice. This is advice that many financial advisors give, but it is too simple to cover everyone’s unique situations. Instead, I like this formula:

Total need - total liquid net worth + a bit of cushion = amount of life insurance needed.

You’ll need 80% of your income in retirement. Not good advice. It's too general and is based on what you earn, not what you spend. I suggest you estimate what you think you'll spend in retirement by creating a mock budget. Adjust it every two or three years. Then save to cover those expenses plus a little bit extra. Oh, and don't forget to factor in the impact of inflation.

Get the full employer match to your 401k. Good advice. Why? It's FREE MONEY! And a lot of it to boot! If you average $50,000 per year over a 40-year career and get a 100% match on the first 3% you put into your plan, that's $60,000 in FREE MONEY before you add in any growth. In addition, it's a 100% return on your money. Investors are struggling to make 10% on a regular basis, so IMO, 100% is pretty good. ;-)

Your total debt load shouldn’t exceed 36% of your income. Good advice in general. The only think I can add is that this 36% is the ceiling -- you should not be above it -- and the lower, the better IMO.

When paying off debt, pay the debt with the highest interest rate first. Good advice mathematically, but bad advice psychologically. I won't go over the reasons I used to think the "highest rate" option was better but have changed my mind over the years, but if you're interested in more details you can read What's the Best Way to Pay Off Credit Card Debt?

There you have it. Eight common pieces of financial advice. What's your take on these? Do you agree with me on which rules offer good advice and which offer bad advice?

The discipline of constantly questioning how your money is managed applies to all areas of your financial life. A healthy skepticism will serve you well, especially when picking funds or ETFs. Most investors with account balances under $100,000 should probably only buy ETFs or mutual funds that charge low management fees. If you must choose actively managed mutual funds, look at more than one year’s performance. Compare fund fees. At minimum, see how the fund fared over five years. Ideally, review a fund’s performance over its entire lifecycle. If the fund changed managers, look at how each manager performed. A lot of changes might indicate trouble at the fund. It is probably a good idea to initially avoid mutual fund rankings like Morningstar’s star system. Do the work yourself. Develop your own opinion, and then compare it to Morningstar or other companies that rate funds.

The idea of owning indexes or ETFs that track the market is scary for many investors. Indexes rise and fall with the market. Actively managed funds have someone at the helm who hopefully buys low and sells high. Yet, some two-thirds of all mutual fund managers fail to beat their benchmarks.

Standard & Poor’s put the question to the test. The company found that 71.9 percent of actively managed, large-capitalization mutual funds failed to outperform the S&P 500 from 2004 to 2008. The number was even higher for the S&P MidCap 400; 79.1 percent of mid-capitalization funds failed to outperform the Index. The number was even more dramatic for small-capitalization mutual funds; 85.5 percent of those funds failed to beat the S&P SmallCap 600 Index. Fixed income and international funds had similar performance. The results were similar in the 1999 to 2003 market cycle.

Standard & Poor’s has a vested interest in shaping perceptions about index funds and actively managed funds. The company makes loads of money licensing its indexes to mutual funds and other financial groups. But the Massachusetts Pension Reserves Investment Management Board does is not similarly conflicted. The fund has a simple mandate: increasing returns on the almost $47 billion under management.

In August 2008, in the midst of the credit crisis, the pension fund fired five active-fund managers for poor performance. Money was taken from Legg Mason, Gardner Lewis, NWQ Investment, Mazama Capital, and Ariel Capital and invested in a Russell 3000 Index and a variety of hedge funds.

“We’ve been managing money here for 24 years and our approach utilizing traditional long-only equity managers has not added value over that span,” according to Michael Travaglini, who at the time was the pension’s executive director.

The pension fund’s decision attracted little attention off Wall Street. Dennis Gartman, publisher of the influential Gartman Letter, read by top hedge funds and banks, felt compelled to alert his subscribers to the decision’s importance. He wrote:

“We strongly suggest that long-only equity managers read, and reread and re-read again Mr. Travaglini’s comment for we fear that this is the death knell for the long-only stock fund manager. His/her age has passed. The era of paying managers to be long of the equity market only, and to recompense them and to applaud them for relative performance is dying,” Gartman wrote. “Money, in the future, will pay only for performance beyond a very small fixed fee, and it will be quite happy to pay well for excess performance. At the same time, it will be swift in culling those managers who do not perform positively.”

Indeed, Travaglini explained his funds decision by saying the pension fund wanted to create a structure that “consistently added value”— and that is precisely the key issue that all investors must remember when dealing with stockbrokers and mutual funds.

The following is a guest post from Steve at Money Infant. Steve has embraced an early retirement and pays for it with side hustles developed over the past 5 years as well as by living a frugal lifestyle. Early semi retirement has enabled him to move his family to Thailand where they are all enjoying a new culture and way of life.

If you are preparing for the world of early semi retirement one thing you might want to consider is getting into some sort of side hustle. A side hustle is simply something you do in addition to your "regular" job in order to make additional money. Getting something like this started well in advance of your early retirement date (3-5 years) can benefit you in several ways:

You'll be able to boost your savings leading up to your early semi retirement.

You will have a ready made stream of income when you do jump into early retirement.

You will have an activity to take up at least part of your new found free time and help you avoid drifting.

If your side hustle ends up being more lucrative than you thought it would be it could spur you to an even earlier early retirement.

While many people try to focus on the savings side of personal finance, I've always taken a more balanced approach and put just as much emphasis on the earning side of the equation. Let's face it, you can only save so much. If you are spending $5000/mo the most you could possibly save is...well $5000/mo. I have no idea how you could lower your expenses to $0 though, so if you do let me know below.

On the other hand, your income is theoretically unlimited. Just ask Bill Gates, Warren Buffet or Mark Zuckerberg. Granted there is small chance you'll be making billions of dollars, but there's no reason to think you can't make tens of thousands or even millions. Before you make a single cent though you need to find a great side hustle.

There are many different kinds of side hustles, from those that are one off like selling your crap on eBay to those that could eventually provide a full time income. The choice is up to you and is dependent on how much money do you want to make from your side hustle and how much time do you want to put into it.

One off side hustles

Sell your crap on eBay

Old school - Hold a yardsale to sell your crap

Ongoing part time side hustles

Donate plasma. You can make over $200/mo

Complete surveys and participate in focus groups

House sitting or babysitting

Make money from the Collaborative Consumption sites. Rent part of your house on Airbnb, give tours on Sidetour, teach classes on Skillshare, cook meals on Housbites, rent your tools on NeighborGoods, do odd jobs on TaskRabbit, become a tutor on Tutorspree.

Possible long term side hustles (Note: All of these can be part time as well)

Become a professional dog walker/pet sitter

Start a freelance business. Plenty of opportunities here from writing to software development

As you can see, there are plenty of opportunities out there to make extra money on the side. The only thing holding you back is you. Instead of going out after work or coming home and planting yourself in front of the TV or compuer make time to create a side hustle income. You can start small with just an hour or two a day and I am willing to bet that if you stick with it you will be surprised at what an hour a day can yield 3, 6 or 12 months down the road.

Imagine after 3 years time your side hustle was making $3000/mo (not that difficult to achieve). Would you be more likely to consider an early semi retirement? If it meant you could spend your time doing something you love or at the very least enjoy, wouldn't it be worth it? If it gave you more freedom and options for how to live your life and who to spend your time with would you be more motivated to start now?

“What is one thing a Christian should keep in mind while thinking about/planning for retirement?”

Here was my response:

“That there’s no mention of retirement in the Bible — at least not the 'quit work and enjoy the good life' sort of retirement. From a biblical standpoint, you simply move from one thing (work, a career) to another (serving for a non-profit, sharing your experience with those who can benefit from it). So 'retirement' is not a vacation, simply a change of what you do during your 'working' hours.”

This response may come across as funny to some of you since I write so much about retirement. But if you read closely, I don't plan to save up a ton of money so I can do nothing/only relax. I plan to keep working as long as I can and, in particular, I hope some of that "work" can be time volunteering to help others.

April 21, 2012

The common wisdom that a 4% annual withdrawal rate is the safe way to avoid outliving your money is increasingly coming under fire. In fact, it may well become a thing of the past.

The theory was simple: If you spent a maximum of 4% per year of your retirement funds, the decline in principle will be slow enough that your money would last as long as you did. Though the percentage seems modest and the reasoning sound, this 4% rule ignores two factors that have become increasingly, glaringly relevant: first, market volatility, which has battered retirement savings over the last decade, and second, inflation, the silent force that erodes purchasing power year after year.

So what is the answer? Here's what they suggest:

Retirement planning should always be individualized: Rules of thumb like the 4% withdrawal rate don't take into account variables in lifestyle, nor can they account for elements like market volatility and inflation.

Here's my take on this:

I always prefer the specific over the general when it comes to managing money and especially when it comes to retirement planning. When I updated my retirement plan, I made specific estimates of both expenses and income to get it to be as on target as possible.

I really hate the "you PROBABLY will have enough money until you die but there's a possibility you may not" line of thinking/planning. That's why I prefer what I call the safest retirement. It's what I'm working towards.

If you are really, really, really into this topic (of how 4% came to be the standard and why it's not a safe figure to use), check out Financial Mentor's post titled Are Safe Withdrawal Rates Really Safe?

April 20, 2012

The following is the latest post in my "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.

If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going.

Next in the series is FMF reader PD. He answered my questions (in red below) as follows:

Please tell us a bit about yourself.

I am 27 and have been married almost 4 years to my wife (26). We have a 6 month old daughter and 2 dogs. We live in a suburb of a major metropolitan city in the Midwest with an average cost of living.

I have a B.S. in engineering and my wife has a B.A. in English Literature. I am an engineer for a Fortune 500 company in a high tech industry that is very stable and expected to grow with the aging population (I bet you can guess the industry!). My wife works as a writer/editor/project manager/director for a small company which makes it inherently less stable. Our family takes care of our daughter during the day as we both work full-time.

Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).

As I described, we both work full-time and our family takes care of our daughter. Our household income is in the low 6 figures. We both have gotten regular yearly raises and I now earn the majority of our income. All of our benefits are through my work as well. We are currently contributing 3% of my gross income to a 401(k) to earn the max company match of 3%. In the 401(k) and other retirement accounts, we have saved ~$50K. We also have a small amount of company stock. We have 8 months of minimum expenses saved for our emergency fund where if we had to use it, we’d cut everything out of our budget except necessities.

We currently have a mortgage at 5.25% fixed for our house for a payment of $1550/mo including insurance, taxes, and PMI. We have no credit card debt. In the last couple years, we bought 2 newer used cars because our old cars broke down. One is paid for, the other we owe ~$10K @ 2%. We also have 4 student loans totaling ~$25K ranging from 3.8% to 5.5%--about half is on one loan at the highest rate of 5.5%. Our other expenses are normal for food, utilities, telecom + mobile phones, insurance, etc. We also pay our family for watching our daughter, but we still save over what daycare would cost. We’ve been conscious of making good decisions, but not beating ourselves over the head to save every last penny. We live a relatively normal life, but well within our means.

What are the current financial issues you're facing (saving, paying off debt, etc.)?

What’s most difficult for us right now is deciding what our highest priority is. When the little one came, we reduced the 401(k) contribution to receive the match, but wanted to make sure we could cover unforeseen expenses without going into savings or using credit cards (banish the thought!). (Aside: we do use credit cards to get rewards, but they are paid in full every month). I want to wait to see what our 2011 tax return will look like as last year we had to pay (better than getting a check back, I guess). After that, we need to prioritize: 1) moving to a new house, 2) saving more for retirement in the 401(k) or Roth 401(k) option I have at work, 3) saving for our daughter in a 529 plan, or 4) paying off our student loans.

We are considering moving because our house is very old and small. It was very charming when we bought it in 2008 and it has been great for us as a couple, but we’ve found that 1 tiny bathroom and an old small house is not ideal for a growing family, especially since we want more kids starting in a few years, hopefully ending up with 3 or 4. The other reason we are considering it is that rates will probably never be this low again in our lives and home prices are nearing lows (so it seems), so we would get good value for a home we’d be in for a long time. The downside to this is that if we pursued the type of home we would want to stay in for a long time, we would not have very much extra income left over for the other 3 priorities. If we decide to stay in our current house, we’d refinance our mortgage and save 1-1.25% on the interest rate.

After making the decision to move or not, I am leaning towards the debt repayment starting with the student loans as the car loan is such a low rate. Tackling debt is the next priority because we are debt averse and we’re already getting the 401(k) match. I’d appreciate any input readers might have!

What are your plans for the future (retire early, build your career, etc.)?

Once we take care of our most pressing issues I described, we’d like to be able to have my wife stay at home and take care of the family. If I can continue on my path and get a couple promotions, I think this is possible in 5-7 years. This is contingent on being able to continue saving a large portion of my income for investments/retirement and hopefully retire or semi-retire in ~25 years.

Be realistic about your financial situation. Without an accurate starting picture, you can’t possibly determine priorities. We have friends who live way beyond their means, but aren’t realistic about what they can afford and save nothing (“We have plenty of time”), yet they talk about getting new cars and other luxuries. We try to steer them in the right direction, but they don’t want to listen. It’s painful to watch.

We’ve worked hard and are fortunate to be in a situation where we have some flexibility in our finances and now have some more nuanced choices to make where subjective factors come into play. We’ve also made the decision to live a normal, yet comfortable life instead of worrying about every last cent. The important part is that we first took an objective look at our situation, and made decisions based on that information.

If you’ve read FMF for any length of time, you know the best way to grow your wealth is to maximize earnings and minimize expenses, thus maximizing the difference and taking that into investment. BUT, if I had to choose between earning more and spending less, I choose earning more. There is a floor to how much you can cut from your budget, but there is no ceiling to how much you can earn. And for me personally, I’d rather not budget how many squares of toilet paper we are allowed to use. ;-)

Overall, what this means to us is that finance is the means to an end, not the end in itself.

3. Video Games -- I buy a video game every once in a great while (even for my kids) and we pay full price only on the must-have-it-now-as-soon-as-it-comes-out videos which, for us, is probably once every other year.

4. Clothing -- I get discounts on most clothing. Even stuff from Nike can be gotten cheaper at an outlet mall or with a retailer coupon (that come out infrequently, but are decent if you wait for them.)

10. Lodging -- We ALWAYS use the AAA discount if another one is not available.

11. Outdoor Activities -- Our outdoor activities are free already.

12. Vacation Packages -- We did shop around for our cruise to get the best price and do so with any big expenditure (like a vacation) we take.

13. Car Rentals -- I don't rent cars that much these days. But when we do (like for vacation) we usually work through Costco, websites, or AAA to get the best rate.

14. Appliances -- I haven't purchased a new appliance in years. Maybe time to start putting this tip into action. :)

15. Flowers -- We get our flowers free from my rose garden or from a local discount florist.

16. Around-the-House Services -- We don't have regular services, but for ones we do use (plumber, electrician) we usually get quotes and/or have a coupon (yep, our plumber has coupons.)

17. In-Theater Movies -- We sometimes get discount coupons and sometimes get good levels of cash back with our credit cards (one gives us 5% off this quarter.) We also go to the $4 theater versus the "full price" one.

18. DVD Rentals -- We rent from Red Box when we do rent -- which isn't often. We have cable and a DVR so there's always something saved to watch.

19. Music -- Again, the library. And somehow we seem to get iTunes gift cards left and right.

20. Airfare -- We saved on our cruise airfare with a HUGE credit card promotion ($625 bonus) but most of our travel is covered by my work (since it's for business reasons).

A couple weeks ago a reader made a comment here on a post saying he had retired early several years ago. Since I love stories of how people are actually making and working through financial decisions, I emailed him and asked if he'd be willing to tell us how he did it. He was and here's his story:

I retired when I was 55 years, 11 months and one week old. (I retired just before my 56th birthday so I could say “I retired at 55.”) My wife retired a year later, by her choice. To us “normal” retirement age was always 65; we expected to work until then or even later. But when I was in my late 40’s I read “Your Money or Your Life” by Joe Dominguez and Vicki Robin. It changed my thinking and in the long run, my life. The key for me was understanding their concept of “enough.” I then read the book to my wife as we were traveling to see children and grandchildren about 2 hours away - I read, she drove. Sometimes I would read for the full 2 hours, sometimes for 10 minutes and we spent the rest of the time discussing how it related to us and our situation and making plans. When she got the vision (“you mean I could retire before I’m 65??!!!"), she was on board.

We were both participants in a governmental defined benefit retirement system. We attended retirement system classes on their rules and programs. One of their options was called buy-back, wherein if a person had service time with another governmental agency but was not eligible for retirement benefits; they could buy time in our retirement system. The cost was a little over 10% of current salary for each year of service time purchased. Once the time was fully purchased, it was treated as any other work time for the purpose of calculating retirement income. I did not have much time I could buy back, about 1 ½ years, but my wife could buy back about 15 years. We started small, buying back a year or two at a time but after a while we decided to “sprint” and my wife bought back 8+ years in one lump sum. That meant that almost her entire salary went to buy back (we lived on one salary for a year and a half.) It was a good trial too to see if we could we live on less (I did have some savings we could fall back on if we had to, but mostly we didn’t.)

We never had lots of debt, just a house and sometimes a car (I am not a good automobile negotiator so I get even; I buy a car and keep it often for 10 or 15 years). We had some savings in addition to our retirement programs and 403Bs and we had a rental house (our first home, when we moved up, we kept it and rented it for about 15 years). We sold the rental house right after retirement – being a landlord is not for me. The sale netted us a nice lump sum, even after paying capital gains. It is now in CDs. After retirement we rolled our (relatively small) 403B’s into IRAs and later converted some IRAs into Roth IRAs. We are letting them grow. We will worry about the IRA when we reach 70 or perhaps roll the rest of it into a Roth. Shortly after retirement we finished paying off our mortgage.

In the end, we retired with about 65 to 70% of our income while employed. We were able to retain health insurance from my employer, although it is not subsidized and therefore is substantially more expensive. The discipline of living on one salary has stood us in good stead, and we have lived comfortably. We have relatively simple tastes; we only travel to see children and grandchildren or other family members. Our primary activities are volunteer work for church or community services. We own our home free and clear with no other outstanding debts.

My wife has always known what she wanted to do in retirement: engage in her hobby of quilting full time. I spent the last year before retirement exploring volunteer opportunities for causes I am interested in (again, thanks to Joe and Vickie’s discussion on what to do after you reach FI).

So far, everything has gone great. After 7 ½ years of retirement, we recently moved. We now have a new home in another state (kept the other one) with a mortgage and are starting a new kind of life in a retirement community.

Finding a good stockbroker, or reliable mutual fund, entails luck and considerable effort. But there is one critical part of the investment process that is easy to control and that will immediately increase investment returns: fees.

Fees can prove to be the difference between a comfortable retirement, or not. The issue is significant in a low-return environment such as has existed in the United States for more than a decade, and which some pundits believe could exist for a decade longer as the nation, and world, struggles to emerge from the credit crisis. If a stock portfolio annually advances 5 percent, and an investor pays 1 percent in fees, they are giving away 20 percent of their return. No one thinks that way—but they should.

It is not realistic to expect financial products will be free of fees or transaction costs. There is a cost in running banks, exchanges, and even in organizing and selling mutual funds, and operating a stockbrokerage office. Stockbrokers deserve to be paid for their time. But it is important to be realistic about fees. Fees can influence decisions that stockbrokers make for clients.

If you are a self-directed investor, and make your own decisions, and do your own research, online discount stockbrokerage firms that charge low fees are irresistible. Vanguard’s low-cost index funds and exchange-traded funds (EFTs) are hard to ignore. But most people inevitably turn to, or are recruited by, stockbrokers who work for firms such as Merrill Lynch, Wells Fargo, or UBS.

The president of a brokerage firm, who has asked to remain anonymous for reasons that will soon be apparent, says investors must determine if their stockbroker works from left to right, or right to left. That quizzical phrase is how the stockbrokerage chief thinks about stockbrokers and customers. A stockbroker who works from the left to the right first considers how much fee income he will earn off the customer. Fees then determine what products are sold to the customer.

A stockbroker who works right to left focuses on making the right decisions for customers. Telltale signs that a stockbroker cares more about themselves than their clients are recommendations to invest in mutual funds that charge high management fees, or that have high sales commissions, known as loads. Expensive stock commissions are another sign, especially if the stockbroker frequently recommends buying and selling stocks. Frequent trading can be a sign that your stockbroker is “churning” your account to generate sales commissions. That is a red flag. Something is always wrong if your stockbroker earns more money managing your account than you earn through your investments.

Most people spend their financial lives stuck between the underperformance of mutual funds and the overpromising of stockbrokers. Most people enter the market by first buying mutual funds. The familiarity with mutual funds leads them to climb the risk ladder into stocks, and maybe even options. When they have saved enough money, they usually seek—or are sought by—stockbrokers. Having a stockbroker is a rite of passage for many people. When you have enough money, you have a stockbroker. If people are very lucky, they find a good, honest stockbroker who will treat them, and their money, as if it was their own in the best sense of the phrase. If they are unlucky, or have average luck, they meet stockbrokers who treat the clients’ money like their own in the worst sense of the phrase.

The brokerage firm president knows this. He is torn between overseeing the firm and working as a stockbroker. He believes he could make more money managing clients’ accounts, because investors are desperate to work with honest stockbrokers who work right to left. He says too many stockbrokers think about their own interests over the interests of clients.

Stockbrokers generate fees for their banks, and for themselves, based on the size of their “books.” The book is Wall Street lingo that describes a stockbroker’s assets under management (AUM). The more money a stockbroker “manages,” the more money the stockbroker makes. Most investors pay their stockbrokerage firm a 1 percent annual management fee. The stockbroker shares some percentage of that 1 percent fee with his or her employer. A 1 percent fee may not seem like a lot, but it represents $1 million for every $100 million that a stockbroker manages. It’s hard to say what the average stockbroker earns, but a stockbroker with a decent sized book could make $300,000 to $400,000 each year. The best stockbrokers make more, and they are worth every dime, plus their weight in gold.

If you have access to the top stockbrokers, and top banks, you get the best of all possible worlds. If you have a small account, and just have a few hundred thousand dollars, very few stockbrokers will take the time to work with you. They won’t make enough money. The median account size, according to industry sources, is about $88,000. An account that small maybe merits an annual, hour-long meeting.

The size of the book is an asset for brokers. Books are bought and sold. Sometimes by other brokers. Sometimes by other brokerage firms. Every seven years, some stockbrokers switch firms because they can sell their books and get a big check.

If a stockbroker brings a “book” to a new firm and stays seven years, it is common to get a check for three-times revenue. If a stockbroker has a $450,000 income and generates $1 million a year in commissions or fee-income, that stockbroker can get a $3 million check by moving to a new firm. That’s a big enough number, especially when kids are going to college, weddings need to be paid for, or retirement looms.

Fees are not as salubrious to the financial health of investors. Over time, mutual fund fees, for example, devour investor returns.

According to Vanguard, an important mutual fund company, minimizing costs are critical to long-term investment success. This is a counterintuitive point because many people equate high prices with quality. That logic does not always work in the financial industry. Sometimes, high fees are charged simply because they can, and because the people paying the fees do not understand what they are doing. David F. Swensen, the well-regarded chief of Yale’s pension fund, is a sharp critic of the mutual fund industry. He believes individual investors should own index funds, and avoid actively managed funds that charge higher fees. “Instead of pursuing ephemeral promises of marketbettingstrategies, individuals benefit from adopting the ironclad reality of market- mimicking portfolios managed by not-for-profit investment organizations,” Swensen says.1 He believes the mutual fund industry exploits investors. He thinks the U.S. government should intervene.

Vanguard mutual funds, which satisfies Swensen’s dictum, notes that there are five main factors that determine investment returns: dividends/ interest income; operating costs; transaction costs; and taxes.2 Of those five factors, operating costs are the only ones that are fairly predictable. Those costs cover fees paid to the fund manager and administrative, recordkeeping, and reporting costs.

Vanguard cites a February 2002 study performed by the Financial Research Corporation that shows that expense ratios are the most reliable predictor of future performance. Expense ratios overshadowed past investment performance and Morningstar ratings. Vanguard, which specializes in low-cost mutual funds, has a website tool that shows how much money investors lose because of mutual fund fees. A $250,000 mutual fund investment in a Vanguard fund whose average expense ratio is 0.21 percent, and which rose 8 percent annually, saves investors a significant amount of money compared to a mutual fund that charges a 1.15 percent fee. Over 20 years, investors saved $192,675 if they picked the fund with lower fees.

The difference is even more dramatic over 30 years. A $200,000 investment split between two identical mutual funds that earned 8 percent annually respectively, but that charged different expenses ratios proves the point. An investor would earn $242,079 more by investing in Fund A that charged an expense ratio of 0.2 percent, compared to Fund B’s 1.19 percent expense ratio.3 The double insult for investors is that most mutual funds fail to beat their performance benchmarks. For every Dan Rice at Blackrock who continually beats the market, most fail to keep pace. This means investors often pay top dollar for substandard performance. This is a tricky area. Mutual fund companies often market their hot funds. Many investors chase after those hot mutual funds. The irony is that this year’s hot funds are often next year’s duds. This is because the funds tend to attract so much money that managers have a tough time investing the same way as before—or it means the managers just got lucky. But most mutual fund companies—and therefore most investors—focus on one-year market performance—and not enough on low costs and long-term investment results.

An August 2010 study performed by Morningstar confirms Vanguard’s assertion that expense ratios are a “primary test” in fund selection. Russel Kinnel, the analyst who performed the study, found that fees are the most dependable predictor of performance. When picking funds, he recommends focusing on funds in the cheapest, or two cheapest, quintiles.

“In every single time period and data point tested, low-cost funds beat high-cost funds. Expense ratios are strong predictors of performance,” Kinnel found. “In every asset class over every time period, the cheapest quintile produced higher total returns than the most expensive quintile.”4

For example, the cheapest quintile from 2005 in domestic equity returned an annualized 3.35 percent versus 2.02 percent for the most expensive quintile over the ensuing fi ve years. The gap was similar in other categories, including municipal bonds and taxable bond funds.

Just as dividends are an historically important—and often overlooked— part of the profits investors earn when buying stocks, fees are an important reason why investors often do not earn as much money as implied by the return of certain mutual funds or even entire swatches of the stock market as measured by the Standard & Poor’s 500 Index.

As an exercise, compare your mutual fund’s performance to similar ETFs. ETFs are like mutual funds except they trade on the stock exchange. ETF fees are typically much lower than mutual funds. ETFs are not always superior to mutual funds. Someone who makes small investments each month is probably better off with mutual funds. But someone who has a chunk of cash and is investing in a sector, or even the broad stock market, should consider ETFs—or low-cost index funds. If your mutual fund manager cannot consistently beat a benchmark index, or similar ETF, there is no reason to own the mutual fund. Why pay top dollar for substandard performance?

April 18, 2012

In this series we are looking at the Fama-French three-factor model of investment returns. Any model of investment returns tries to predict an investment's returns and volatility by factors that can be measured in advance of investing.

The first factor, beta, taught us that the riskier, more volatile stocks on average have better returns. These same stocks, however, lose more value when the market is declining. We also learned there is no such thing as a safe investment that pays market rates of return.

The second factor of investing is size as measured by a stock's total capitalization. A stock's capitalization is found by multiplying the current share price times all the outstanding shares of stock. In other words, what would it cost to buy all the outstanding shares of stock at the current share price? This is called the total capitalization of a stock.

Today, large cap generally means stocks with a total capitalization of $10 billion. Mid-cap is between $2 billion and $10 billion. And small cap is less than $2 billion in total capitalization. Sometimes investors also categorize mega-cap stocks as those over $100 billion and micro-cap as those under $300 million. Those below $50 million have been called nano-cap.

These absolute dollar amounts have gradually increased as the total U.S. market capitalization has grown. The analysis that Eugene Fama presented during our conference last fall analyzed returns of the U.S. markets from 1927 through 2010. He analyzed each decile from the largest 10% of the market through the smallest micro-cap. The results were remarkable.

The average return of the largest decile was 10.90%, and the smallest decile was 21.26%. There was a continuum such that each smaller decile showed a higher average return. The average return for the smallest half of the market was 17.24%, a full 3.92% higher than the larger half's 13.32%.Large-cap indexes include the S&P 500 (which is only approximately the 500 largest companies) and the Russell 1000 (which is only approximately the 1000 largest companies). The Dow is also a large-cap index, composed of just 30 large-cap stocks.

The only common small-cap index is the Russell 2000, which is approximately the 2000 stocks after the Russell 1000 largest companies. For the purposes of talking about index returns in this article, I am simply calling the Russell 1000 "large cap" and the Russell 2000 "small cap."

In my own analysis I measured the returns of the Russell 1000 large cap against the Russell 2000 small cap from 1979 through the end of February 2012. During that time period, small cap returned 13.79% versus large cap's 12.94%, a premium of only 0.85%. This is partly due to the last half of the 1990s where large-cap stocks beat small-cap stocks.

But since the 1990s, small-cap stocks have again performed better. In fact, ending February 29, 2012, the Russell 2000 small-cap stocks have an annual return over the past 10 years of 7.00% versus only 4.63% for the Russell 1000 large-cap stocks.

There are many explanations why small firms tend to outperform large firms. First, their share price is more volatile. They have a higher standard deviation that often moves in sync with the markets producing a higher beta. Thus a portion of their excess return is explained by the first factor, beta.Second, it is easier to double the revenue on a small startup company than it is to double the revenue on a large company. The outperformance of small-cap stocks depends on those few companies with exceptional growth. And the smaller the company, the greater the chance of doubling revenue growth.

Small companies are more likely to pay no or smaller dividends. Large cap is currently paying a 1.77% yield while small cap is only paying 1.27%. This is partly because smaller companies need to use the income to grow, whereas larger companies often have nothing better to do with earnings than return them to the shareholders.

The stock of smaller companies are more thinly traded. This means that a single investor can move the stock markets higher by buying and lower by selling. This is part of what makes small-cap stocks more volatile. Part of the excess return of small caps is dampened by the costs of getting in and out of the market moving the market.

When buying or selling small-cap individual stocks, it is important to put in limit orders so a purchase of a given number of shares does not move the market upward and you do not spend more than you had intended. Similarly, using a limit order when selling ensures that you get a fair value for the shares you are offering.

The conclusion from this study suggests that over time small cap will outperform large cap even after factoring out measurements of volatility. In future columns we will look at other factors of investing as well as indicators that suggest times to tilt even more small or back toward large cap.

Social Security. Social Security is the most utilized retirement benefit, with 86 percent of people age 65 and older receiving monthly payments, SSA found.

Income from assets. Just about half of seniors (49 percent) received interest from assets held in bonds, treasury notes, IRAs, certificates of deposit, and interest-bearing savings and checking accounts in 2010.

Pensions. Some current retirees still have access to private pensions or annuities (27 percent) or public pensions (15 percent), such as those provided by the military or federal, state, or local government.

Employment. Continued employment is increasingly becoming a part of the retirement years. Just over a quarter (26 percent) of Americans age 65 and older held a paid job or were self-employed in 2010.

This topic continues to be of interest to me as I ponder and plan for both a safe retirement as well as a potentially early retirement. My thoughts on the list above:

The chances that Social Security will pay much out for someone at my income level are decreasing by the day. My best guess is that the government will ultimately "fix" Social Security (probably at the last possible minute) and that it will be dramatically scaled back for "the rich." Then again, this could take 20 years to work out, so maybe I'll get something. Nevertheless, I'm planning as if I'll receive nothing. Then anything I do get will be gravy.

Income from assets is where I'm putting my focus. At the moment, I'm considering how to split up my current assets, most of which are in various index funds, so they become income producers from multiple, non-correlated sources. For now I'm investigating real estate as my #1 option, but I'm also looking at a few others. I'll keep you informed as I make progress in this area.

I don't have a pension and doubt I ever will.

I do plan to work at least part-time as long as possible, not only because it will provide a decent current income, but because simply by staying "in the game" I will be better able to transition to full-time work if the need arises.

Unfortunately, those who make millions are not the only ones that can be done in by these bad money habits. "Regular people" can too. My thoughts on this list:

One reason I write this blog is to educate people so they know how money works. Most of the concepts are simple -- so simple in fact that almost anyone can understand them. And with just a basic working knowledge of how to manage money, most people will never have to worry about money problems simply because they didn't know enough.

Another benefit of knowing how to manage money is that you can recognize bad advice when you see it. We've all heard stories of people who turned their finances over to some planner or financial advisor simply to have him lose it all. Those who get educated on how to handle their finances can avoid this problem for the most part.

Financial security is a key issue in good money management. My two main suggestions on how to keep your money secure: 1) don't let anyone know how much you make/own and 2) be diligent about managing your money -- knowing where it is, checking account balances regularly, etc.

All the education, planning, and diligence in the world can be undone by bad habits like too much drinking and, of course, drugs. Not much else to say on this subject other than it should be pretty clear to avoid these like the plague.

So these problems aren't limited only to the very wealthy, they can take advantage of anyone. It's just when the numbers are so high (like when a person earns several million dollars a year) and loses it all, it makes for a more interesting story. :)

April 17, 2012

I was recently traveling and stopped in McDonald's for a quick drink. While there, I saw this sign on their soda machine (it's not 100% word-for-word, but most of it is as it was -- I went out to the car and wrote it down as soon as I left to try and capture it all):

Sorry, free refills limited to duration of visit

(in smaller type) No cups brought in from outside are eligible for free refill

I'm not positive what each of these means. Let's take them one at a time:

I'm guessing that "free refills limited to duration of visit" means that you have to buy a cup on this specific visit in order to get a soda and get it refilled for free. But here's a gray area: what if I fill it up a couple times while I am eating. Then I'm done eating and I want to fill it up once more before I leave (to take with me.) Is this allowed? Or am I not able to do this because the duration of my visit has ended?

The "no smaller cups" line seems pretty clear -- but who does this? Who brings in a cup with them and fills it up from McDonald's without repaying? You'd be surprised. Remember this guy? He's probably the reason line two exists.

I'm not a big soda drinker these days, so this doesn't matter much to me. But for those of you who are as well as others who may be interested in the ethical side of the sign note above, what's your take on what is and isn't allowed when it comes to "free refills"?

The following is the latest post in my "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.

If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going.

Next in the series is FMF reader KG. She answered my questions (in red below) as follows:

Please tell us a bit about yourself.

I am 23 years old and my husband is 24. We met in college, got married right after I graduated, and I started my first job soon after. I work at a financial institution making a great salary with a potential bonus of up to 100% of my salary, while my husband is pursuing his dream of working in the sports industry, and right now his income is mostly commission based. Recently, my husband and I made the difficult decision to live apart while he pursues his career since I am halfway through a 3 year contract, and it would be difficult to find a comparable position making the same salary. After my contract is up, I will move to be with my husband.

Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).

As mentioned above, currently we both work. However, it is our hope that I will be able to stop working when we have children. The issue, of course, is that I make most of the money (about 80%). Also, we would like to have a large family. I am one of seven and would like to have at least six, if not more. Knowing both these things ahead of time, we are trying to plan accordingly. We are both pretty frugal. We bring our lunches to work most days, cook dinner at home, use coupons, and most importantly, neither of us like shopping. This year we budgeted to live on $50,000 (after 401k and HSA contributions) which is less than 50% of our base salaries and includes saving $10k for our IRAs. We like to think this is pretty good considering we have 2 rents and the amount of traveling we do to see each other and our families since we don’t live by either family. We both live with roommates to cut down on expenses, but it does not completely cover the extra costs.

Our monthly budget looks like this:

Rents - $1,730

Utilities - $150

Food - $300

Entertainment - $200

Cable - $105

Gym Membership - $15

Travel - $300

Roth IRA - $833

Bus pass - $90 (taken out pre-tax)

We have no debt as we paid off our student loans using my first bonus, and we pay off our credit card every month. Our assets roughly consist of:

Savings Account: $22,000

Car Fund: $5,000

Brokerage Account: $15,000

My Roth IRA: $15,000

Husband's Roth IRA: $15,000

401(k)s: $20,000

HSA: $8,000

The majority of our assets are in retirement accounts. We wanted to contribute as much as possible before we have children. However we've reduced our contributions in order to save up a down payment. Our current strategy is to contribute 4% to our 401(k)s (since our employers match 100% up to 4%) and max out our IRA and HSA contributions.

My husband's paycheck is direct deposited into a brokerage account that we plan to use to start a dividend portfolio. We also direct deposit $300 a month (which we do not include in our budget) from my paycheck into a savings account for a down payment. We have an older car and are saving $100 a month for a new (used) car. We will pay cash for our next car and may pull either from savings or the brokerage account so that we do not have a car loan. We plan to save my last 2 year-end bonuses and upcoming raise for a down payment, although we will use part of my bonus this year to travel to Europe this summer.

We want to keep a minimum of $25k in savings as an emergency fund which we will most likely increase before we have a baby and I stop working. We hope to have at least a $100k down payment before we buy a property, which may not be a while until we know where we will be settling down since that will depend on my husband’s job, but we would like to live by family. However, both of our families live in high cost of living areas which could be an issue for us.

What are the current financial issues you're facing (saving, paying off debt, etc.)?

We are trying to save as much as possible in order to allow me to stay home with our children eventually. My biggest issue currently is saving for a down payment. We would like to purchase a multifamily home (duplex, small apartment complex, etc.) that we could also use as a rental property. I am not sure whether to use the money as a large down payment on a smaller property, such as a duplex, or stretch and purchase a property with more units.

The larger question I'm really struggling with is should we purchase a property with a larger down payment and focus on paying off the mortgage before saving up for another property or should we take advantage of leverage and purchase as many properties as we can and pay off the mortgage over 30 years? The second is riskier but has the potential for higher return. We hope to continue purchasing rental properties so that they can hopefully replace our income one day (in addition to our dividend portfolio). However, neither of us know anything about real estate and are not sure where to start or how to go about purchasing a rental property.

We also have $15k sitting in cash in a brokerage account, which we would like to use to build an income portfolio, but we are not sure how to go about doing this.

What are your plans for the future (retire early, build your career, etc.)?

Our plan for the future is that we will have children soon, and I would like to stop working as soon as possible, depending on my husband's work situation. I realize that most likely I will have to work for a period of time after having children, even though I will most likely take a pay cut when I leave my position. We eventually want to build our dream house out in the country.

Our hope is that eventually we can replace my husband's income through our dividend portfolio and rental income, and hopefully allow him to retire early. I once read that by 2020 the number of millionaires will double and it is our goal to be one of those families. Whether or not we reach this goal will most likely depend on how long I work and how quickly we have kids, but I prefer to aim high.

One issue we are not worried about is paying for college. My husband and I paid for the majority of our college education ourselves, through personal savings, academic scholarships, student loans, and on campus jobs and we expect our children to do the same.

Besides the obvious advice to start as early as possible and live below your means, I would have to say contribute to a Roth IRA. I try to educate all my peers on the benefits and have succeeded in convincing a couple of them to contribute to one. The tax free nature and flexibility of withdrawals makes this a slam dunk for any young person.

Also, don't listen to others. My husband and I bought a 14 year old car from a friend for cheap as at the time we both took the bus to work and live in a very walkable area. We planned to use it only for the occasional drive to visit our families. However, my coworkers said the car wouldn't last a year and that I should buy a new car because they pay me enough and I should look the part. Instead, this was the best purchase we've made thus far as my husband has driven the 16 hour round trip home over a dozen times, and it has saved us thousands of dollars in travel. In addition, it's cheaper to insure and we've haven't had problems with it so far.

How do you know if you're reaching your financial goals or if you're making financial progress? And what can you do to get to where you want to be at a faster rate? These questions get to the heart of one simple matter: you need to keep track of your finances by calculating two simple measures on a regular basis.

These two measures are net worth and cash flow. Knowing them will tell you how you are doing financially. They will also give suggestions on actions you can take to improve your financial situation. With these two key metrics alone, you can measure and track your success in growing your net wealth.

What is net worth?

Net worth is simply the total amount of assets that you own less the value of the debts you owe. Another way to think of it is it's what you would have left over if you sold everything and paid off all your debts.

Written as a formula it looks like this:

Total assets - Total liabilities = Net worth

For example, if you had a $200,000 home, $50,000 in a Roth IRA, $20,000 in credit card debt, and a $100,000 mortgage, you would have a net worth of $130,000 ($250,000 - $120,000).

Net worth reveals your true wealth. In today's media we often hear "wealth" described in terms of income (how much someone makes annually.) But it's not what you EARN that makes you wealthy, it's what you KEEP. This is what net worth measures.

Taken at a point in time, net worth tells you little. Sure, it can let you know if you are in positive territory (own more than you owe) and give you a relative comparison to how others are doing, but those uses are rather limited. Net worth is most useful when it's tracked over time. In this way you can see if you're making financial progress -- if your wealth is increasing. This is why Free Money Finance's tagline is "grow your net worth." Because if you're growing your net worth, you're making financial progress and becoming more wealthy.

As such, it's vital that you measure your net worth on a regular basis. Personally, I update mine once a month (which is pretty easy to do using Quicken) and this is probably the most frequent you'd want to monitor your net worth (any more frequently doesn't really give you enough time to see progress.) Others measure their net worth quarterly or twice a year. I recommend that you check it every three months at the very least.

What is cash flow?

Cash flow measures the amount of income you make less the expenses you pay. It's what you have left over each month after you pay all your bills.

Written as a formula it looks like this:

Total income - Total expenses = Cash flow

For example, if you earn $2,000 a month after taxes and have expenses of $400 for food, $300 for a car payment, $500 for rent, and $500 for all other costs, your monthly cash flow is $300 ($2,000 - $1,700.)

Cash flow is a bit more complicated to track than net worth because it involves so many different moving parts. For instance, income can be made up of several sources such as salaries, dividends, interest, side jobs, hobbies, and any other payments that you receive. Expenses involve everything from taxes and mortgage/rent payments (generally among the largest costs most people have) to small purchases like a daily coffee, a magazine subscription, a sandwich, and everything in between -- anything you spend money on.

People track their cash flow over different periods of time depending on their stage in life, financial constraints (such as when income is made, when expenses are due, etc.), personal preferences, and the like. I recommend younger folks (people in their 20's and early 30's) and those who are close to having a cash flow at break-even (where income equals expenses) or, heaven-forbid, a negative cash flow (where expenses surpass income) track and record their cash flow once a week. Those who have a bit more space between income and expenses and those who have proven to be able to manage and control their finances with less tracking mechanisms can measure their cash flow less frequently like monthly or once a quarter.

I measure my cash flow once a month. Again, it's quite easy to do using Quicken. I suggest people look over their cash flow status at least once a month at the very minimum.

How net worth and cash flow work together

Tracking both net worth and cash flow is important because of how they work together to improve your financial standing. Your cash flow drives the assets you can purchase and debts you can pay off. Through careful planning of your cash flows every month, you are able to grow your net worth -- your true wealth. Here's how the cycle works:

Each month, you make income from various sources.

Each month, you have expenses from various commitments.

The difference between income and expenses is what you have left over -- your cash flow.

This cash flow is an asset -- which then adds to the "good" side of your net worth.

In addition, you may have made debt payments from your cash flow that month that lowers the "bad" side of your net worth.

If you create a surplus in this way month after month, you will grow your net worth over time and thus become wealthier over time.

In the examples above you have $300 every month left over in cash flow. In addition, let's say of the $1,700 in monthly expenses you had, $400 went to debts and decreased liabilities you had. As such, your net worth increased by $700 that month ($300 + $400). If you did this for a year, your net worth would increase by $$8,400 a year ($700 per month * 12 months).

Tips for growing your wealth

If you've followed along so far, you've probably realized that the formulas are pretty simple. If you want to become wealthier (which means increasing your net worth), there are only a few steps you can take to do so. They are:

Earn more income. This has the result of increasing your cash flow and thus allows you to add more money to your assets and/or pay off more debt every month -- both of which increase your net worth. For ideas on how to make more money, see 11 Great Ways to Earn More Money.

Decrease/limit your expenses. This has the result of increasing your cash flow and thus allows you to add more money to your assets and/or pay off more debt every month -- both of which increase your net worth. For ideas on how to lower your expenses, see my various "saving money" categories in the FMF archives (at the bottom).

Do both. You can significantly improve your finances if you do both of the above -- grow your income AND decrease your expenses. This super-charges your cash flow and allows you to grow your net worth at an even faster rate.

Increase the value of your assets. This involves managing your assets so they grow in value at a faster rate than they might if left on their own. For instance, $100k left in a CD might earn you 1% a year, contributing an extra $1,000 to your net worth annually. But the same $100k invested in an index fund could earn you 8% a year or $8,000 total. See how the actions you take can grow your net worth? Of course this is a very simplistic example and there are many other factors to consider. But for the purposes of this post it illustrates nicely the benefits to your net worth when you work to grow your assets.

Putting it all together

For the more experienced FMF readers, this post has probably provided few new insights. But for others, this information may be overwhelming. If that's the case, let me simplify the entire process for you. Here's a list of what you should do with the information above:

Calculate your net worth. Do it soon so you know where you stand. Then set in place a regular update (like monthly) so you can monitor your progress.

Calculate your cash flow. Do it soon and also plan to update it at least once a month if you fit the circumstances I've noted above.

Look over your cash flow to identify ways you can grow your income and decrease expenses. Make a list of next steps to take and start knocking them off one-by-one.

Look over your net worth and see if there are any assets you can grow. While it's difficult to increase the value of some assets (like your home), others (like investments in stocks and bonds) can often be sources for additional growth. Start to educate yourself on the potential options for making what you own work as hard as possible for you.

In the end, by tracking these two simple measures on a regular basis, you can take steps to significantly grow your net worth over time and ultimately meet almost any realistic financial objective you set for yourself.

April 16, 2012

US News lists the new three-legged retirement stool (what they call "a blueprint for nailing down a realistic retirement and securing your financial future") as follows:

1. Plan to work in early retirement. If you like your job and can keep it through your late 60s, you're in a good position. Don't blow it. Stay on the job.

2. Live below your means. Set a goal to live on 20 percent less than your income, instead of 10 percent more.

3. Invest in some risky assets. When my dad retired he could put his savings in a bank, collect 5 percent interest, and live off the proceeds. But today, with banks paying less than 1 percent, that's no longer an option. You need to swallow hard and invest some of your savings in the stock and bond markets.

It's an interesting list, but not really a "stool" in the way "Social Security, a pension, and personal savings" (the "old" three-legged stool) was. Here's what I would recommend instead as the basis for a solid retirement "stool" of this sort:

Save enough during your working career to live on the income generated by your savings. This requires living below your means for many years prior to your kids leaving the nest, something the above scenario assumes can't happen until they are gone. Oh, and if you want to retire anywhere near to on time with this level of assets you'll need to save way more than 20% of your income (unless you make a fortune and can live off a small percentage of it.)

"Work" enough to at least partially offset your expenses as long as you get something out of it. I put "work" in quotes because once you have point #1 handled, you can be very choosey about what you job is. Pick something you enjoy (perhaps a cause near and dear to your heart but that didn't pay well enough for you to accept such a spot in the past). And as for "what you get out of it", I mean not only a salary and enjoyment but the mental stimulation that keeps you "in the game", which helps with both keeping your mind strong as well as provides a way to ramp back up to full-time employment in case circumstances require it.

Everything else is gravy. Social Security is gravy. Other income is gravy. Extra appreciation of your assets is gravy (you just need them to produce income and enough appreciation to match inflation, the rest is all extra.) And so on.

So that would be my three-legged stool, which looks more like a two-legged stool to me. I could have broken up #1 into the types of assets you'd need to create a viable income, the steps needed to accumulate such a large amount of assets in the first place, and so on, but I think you get the picture. And why drag it on anyway? This gets the point across.

The following is a guest post from Steve at Money Infant. Steve is an early semi retired guy living in Thailand and blogging about personal finance from the perspective of someone who values experience over material things.

I've written previously about what early semi retirement is, some of the possibilities it creates and whether or not it is really all that we think it is. The real reason you read these articles though have nothing to do with what I think about early semi retirement. The question in your mind is whether of not early semi retirement is for you.

It is a good question and believe it or not it's one that many struggle with. You would think that the idea of an early retirement would be attractive to most, but the reality is there are several potential downsides that keep people afraid of trying out retirement at an early age.

Here are some of the criteria I feel are important to meet before jumping into the pool of early semi retired folks:

If you have a steady and diverse stream of income then early semi retirement might be for you.

If you have a solid network of friends and family outside work then early semi retirement might be for you

If you enjoy freedom and thrive on the challenge of being completely responsible for your own destiny then early semi retirement might be for you.

If you want to grow an established small business then early semi retirement might be for you.

If you are sure you will be able to fill your days with a sense of purpose, without the need for work then early semi retirement might be for you.

If your own self worth isn't measured by your job you might be ready for early semi retirement.

If you want to spend more time with your family early semi retirement might be for you.

As you can see there are plenty of good reasons to join the ranks of the early semi retired, but only if it makes sense for you. Some people actually enjoy their jobs or at least the social interaction they get at work. For these people early semi retirement could be stressful and unfulfilling and could even lead to depression and a feeling of worthlessness.

Think about what your life might be like if you didn't have to get up every morning and go spend 8 hours doing work for someone else. Would you still be able to motivate yourself? Would you become a shut in with nowhere to go every day? Would you have the level of social interaction you need to remain happy? These are all good questions that should be answered BEFORE you dive head first into the pool of early semi retirement.

If you want to make as much money as possible, you need to do it all: get a lucrative college degree (like an undergrad engineering degree or an MBA) in a lucrative industry (where pay is generally higher than other industries -- think "oil versus education") in a lucrative field (doing something your industry values -- marketing, finance, etc. -- varies by industry) and then work as hard as you can to maximize that earning potential over the course of your career.

This isn't to say that you can't earn a high salary in almost any field. You can. It's just easier to do in some than in others.

Someone will probably make the "a career isn't all about money" statement. This is true. There are many non-financial issues associated with working. But the "do what you love and the money will follow" is a bunch of bunk as well. IMO, do what you like is a better balance.

The whole issue of college, the value of it, and so on is in my mind a lot these days as my kids are in the first years of high school. It won't be long until they choose their paths and there's a lot to consider between now and then.

“If you could somehow, someway get all Christians to have the same financial New Year’s resolution…what would it be?”

Here was my response:

“Give at least 10% of their income to organizations that help the poor, hurting, and disadvantaged.”

This is where my focus is this year -- in both my giving as well as my volunteer activities. I want to help those who are needy, poor, left behind (in many ways) by society, etc. That's why I answered the way I did. Imagine what could be done for these people if the average Christian gave 10% away versus the 2-3% that studies show they actually give away.

As you know, I'm not a big fan of financial advisors. I would suggest you instead go to the library and check out some great personal finance books. Read them, then apply what they say. You'll not only set your finances up for great gains but also learn enough about managing your money so that you won't need to hire a financial advisor.

Investing in your home's appearance is an "ok" idea, especially if you're going to sell. That said, I think there are better options.

Getting a will is a GREAT idea IMO. If you don't have one, get one! And if you have an outdated one, get it revised. And it shouldn't cost you $1,000 either -- assuming you have standard needs/financial issues.

April 13, 2012

The following is the latest post in my "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.

If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going.

Next in the series is FMF reader JV. She answered my questions (in red below) as follows:

Please tell us a bit about yourself.

I am a 24 year old single female in the Midwest. I have been in a serious relationship for almost 5 years and we have talked extensively about getting married in the next couple of years. I currently live with my parents and have done so since graduating college with a double major in Accounting and Finance in May 2010. While in college I worked part time in customer service at a financial institution. After graduating I knew I did not want to leave my small town because my family and my boyfriend were there so I kept the job at the FI.

Describe your financial situation.

I work full time in customer service at the same FI, and when my schooling ended I was bored, so I picked up a part time job at a major discount store where I cashier approximately 3 nights a week (13 hours). These two jobs earn me a combined 32000 a year (26k from full time job and 6 from part time job). After taxes I net about 2000 a month. From this $50 goes towards my student loan payment, and I charge about $300 more on other stuff (gas, food, clothes, gym membership, etc.). I then can save the rest of my paycheck (around 1650 a month). Soon I will be quitting my part time job as I had it to pay off my debt. This will cut my savings to approximately $1250/month.

My parents are set quite well financially and do not make me pay rent or insurance or anything—I have offered they don’t want it. (I have thought about giving them something like a small trip for their anniversary this year though). I also have a newer car (2005) that runs great. I know I am quite fortunate to have parents that were financially responsible and that taught me to save. Right now my accounts are in these standings:

Regular Checking – 3500

Rewards Checking – 25000 (earning more than 3% interest!)

Fun Account – 1100 for any trips or vacations I may want to take…funded through any extra money I receive

CD – 5000 in a CD @ 1.3% with an October maturity

Roth IRA’s – 7000

401k – 5500 with 4% contribution 2% match – end of year usually 2% of gross pay added as profit sharing (should increase after this year to 5% of gross pay)

Student Loan – I paid it down to $1500 ($50 payment) it is currently at 3%. I was going to pay it all off and finish the final loan from the $22000 debt I graduated college with, but I feel I should have a current payment besides credit cards on my credit report for when I do go to purchase a house.

What are the current financial issues you’re facing?

Currently I am looking at saving money for a lot of things. For the wedding in a couple years my parents will not pay for the photographer, limo/party bus, or any dance/alcohol (should total approximately $2-3000). I am also starting to save for a honeymoon (another $3-4000 – may be a lot less, but just in case I want to do something really extravagant), as well as for a down payment on a house (which is what the 30k is saved up for so far – rewards checking and CD).

In my little corner of the Midwest, housing prices are quite cheap compared to where many other FMF readers are from. Housing prices can get as cheap as 100k if I want a one bedroom one bathroom house, but I would really like something a little better. From housing prices in a 15 mile radius from my town the home price is probably closer to 175 for an average house. I am still very unsure what to do with my money. I would really like to be able to afford a home on my salary only instead of relying on what I may have with my boyfriend’s salary (about 40k with minimal debt). With my full time job I can only afford a mortgage of 110k.

The problem I have with my salary is that I have applied all over the area. I have gotten some interviews, but the determining factor is that I have no real experience in accounting. If I want to get into a bigger job market, I am looking at 1 hour away minimum—rural Midwest really isn’t helping me out.

Really what I want somebody to do is to tell me what I should do. Should I keep socking money away for a down payment or should I be doing something else instead? – I am a little weary of the stock market. I am not sure how this election is going to play out, but it could cause a lot of changes. I am also not sure where I should be investing. I am kind of risk adverse. Are index funds really as good as you say?

What are your plans for the future?

As I said earlier I strongly believe I will be married in the next few years. I am also looking at getting my CPA license. I do not feel challenged at my current job and I really want something that can push me intellectually. I looked at Becker and it will be nearly 4k for study materials, flash cards, and exam review (gulp); and then almost 1k more just to take the test. I also want to increase my investing as I have no real use for the money once I get enough for a substantial house payment (hopefully 50k by next spring).

What’s your best piece of financial advice?

In writing this, I thought of many different things I could have put as my best piece of financial advice. However, somebody else has already said all of them. I would say that my NEW best piece of advice is to not be discouraged about your situation. I see commenter’s that compare themselves to the profiles listed on this site but as long as commenter’s are able to live without racking up debt I don’t see a reason to complain. FMF states “The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here)” That means not everybody will be approaching life, or even be at the same point in life as you are. For example, I know my salary is quite low, but as long as I feel I am fulfilling my duties I don’t see a reason to covet a six-figure salary.

Now that you know how to use a great résumé, let’s examine how to write one—starting with spelling your name correctly. No kidding. I’ve seen names misspelled because résumé writers just assumed they had typed their names correctly and never checked to make sure. I’ve done it myself on letters and emails. Hardly anything is more embarrassing on a résumé. Imagine that you’re the employer and you find that an applicant’s name is spelled differently on the résumé than in the cover letter. How would you feel about that applicant?

Avoid chummy nicknames. “Jack” is okay for John. “Pete” is fine for Peter. But don’t use “Natster” for Nate or Nathaniel. Even if you want all of your friends and coworkers to call you “Butch” or “Sammy” (for Samantha), use your formal, given name on your résumé. My legal name is Quentin, so I always use it on résumés, applications, and business cards, even though friends call me “Quin,” “Q,” or “Dr. Q.” Informalities are great for hanging out, but not for writing résumés. Respect your formal name. Employers will respect you for using it. When you meet potential employers, you can invite them to use your nickname if it’s appropriate for a professional setting: “Glad to meet you. I’m Cynthia Smith, but please call me ‘Cindy.’”

Use a middle initial, especially if your first and last names are relatively common. A middle initial helps to individualize your résumé as your own life story. It also says that you respect formalities and legalities. If your first and last names are extremely common (for example, James Smith or Susan Jones), you should use your full middle name. Think about it this way: What name would you use on a business card that you hope to still be using ten years from now? Think distinguished future career, not present friends. Think business card, not Facebook. Be sure to use the same full name on LinkedIn.com.

Include other personal designations or titles only if they are necessarily distinctive or professionally important because you have used them in the past or intend to use them in the nonimmediate future. These include such designations as “Jr.,” “II,” “Hon.,” certification or credential designations, and significant educational degrees that are not always necessary in a field and thus set you apart (such as “BSN” for Bachelor of Science in Nursing). If your parent has the same first and last names as you do and they live in the area where you are applying for positions, it is essential to distinguish yourself in some way, such as by using “Jr.” or perhaps spelling out your full middle name—assuming it is different from your parent’s middle name.

This kind of nuttiness screams “ARROGANT!” Keep your name simple, straightforward, and appropriate rather than excessively formal.

After putting your name at the top of the résumé, list your contact information—the “numbers” interested parties will need in order to get and stay in touch with you, even if they don’t respond to your résumé immediately. You never know how long your past résumés will be floating around various offices and sitting in digital databases awaiting retrieval. Therefore, you need to specify where you’ll be and how you can be tracked down in both the near and not-so-immediate future.

This is especially important in seasonal hiring and in economically sensitive careers. For instance, if a teacher leaves midyear, a school principal or superintendent will review on-file résumés in the hope of making a fairly quick hiring decision. In advertising, jobs tend to come and go with the economy. Similarly, sales opportunities can rise and fall with the fortunes of particular companies and product lines. My point is that employers often maintain files of possible candidate résumés to review as needed. This is why it’s essential to include long-term as well as short-term contact information on your résumé.

In most cases you’ll need to submit your résumé along with a cover letter (more on this later) explaining how you heard about the position and why you’re the ideal candidate for it. Even though you include contact information in the letter, you should add it to your résumé as well. Cover letters and résumés sometimes get separated in offices and on computers. If you decide to use a header with your name on the top of a two-page résumé, don’t include the header on the first page (just like for page numbers).

If you’re currently a student, chances are you don’t know for certain where you’ll be living, let alone working, in a year or two. So you have two options: (1) Create semipermanent contact information, such as a longer-term email address, phone number, and postal address (usually a stable relative’s location), or (2) create a new kind of résumé to self-destruct in both paper and digital formats, leaving no trace of your existence. While the second option might be great if you’re trying to replace the latest James Bond actor, the first option is more realistic. And it’s simple to accomplish: Use your parents’, mature siblings’, or in-laws’ postal address, a Web-based email address (for example, a “Gmail” account) that you check daily or that forwards to your changing work or school email accounts, and, if possible, telephone and fax numbers that will be maintained longer by professional-sounding friends or family-related businesses.

International postal addresses that might not be reliable or might have excessively slow delivery (most military addresses with domestic addresses are exceptions)

Incomplete phone numbers (such as numbers that lack area codes, direct office extensions, or full international dialing codes)

Fax numbers that require someone to call ahead to ask the fax operator to turn on the fax machine (unprofessional)

Phone numbers that lead to silly or inappropriate voice-mail messages (“I’m not here right now because I’m out partying….”)

Business phone numbers or email addresses for places where you currently work—unless you have the permission of your current employer(s)

Consider including the following in your résumé:

A phonetic spelling of your last name if it isn’t easy to pronounce correctly. I include this on my résumé and website: “The ‘e’ in ‘Schultze’ is silent.” This puts at ease those who have to call me on the phone or introduce me to others. I, too, feel awkward phoning someone who has a last name I’m unsure about pronouncing correctly.

A more permanent, dedicated fax number from one of the online services that provides a fax-only phone number (these businesses convert the incoming fax to a computer image file—usually a PDF—and immediately send it to your email address as an attachment) so that you don’t need to have a landline phone in order to receive a fax. Fax machines are an old-fashioned technology in the age of computer scanning and email attachments, but some businesses and nonprofit organizations still use them extensively. By the way, some of the online fax services will also provide a voice-mail option for the fax telephone number they issue you. That might be a fitting option if you would like to provide a super-professional-sounding voice-mail message just for that one, dedicated phone line.

The box of books giveaways through my giveaway newsletter have been very popular, so below I'm detailing another set of them that will be up for grabs this month (if you want a chance to win, be sure to sign up for my newsletter here.) For now, here are the books I've received from publishers and a bit about them (from Amazon):

7 Money Rules for Life®: How to Take Control of Your Financial Future - Americans young and old are flunking their finances. A shocking 77 percent live paycheck to paycheck with no savings. And 43 percent of Americans have less than $10,000 saved for retirement, while 49 percent could cover less than one month's expenses if they lost their income. In the face of this bleak financial picture, bestselling author and finance expert Mary Hunt offers 7 Money Rules for Life®. This no-nonsense and encouraging book gives readers the keys to get their money under control and get prepared financially for the rest of their lives. In her warm and engaging style, Hunt takes everything that she's learned over the past twenty years and boils it all down. Presented in a conversational style and readable in a weekend, this book offers applications for each of the seven rules as well as practical advice for how to recover from past financial mistakes. These simple, unchanging, basic rules work in every financial situation, for every income level, and for every stage of life.

The Psychology of Wealth: Understand Your Relationship with Money and Achieve Prosperity - People who enjoy a healthy relationship with money share common habits and traits. So, how do they think, and what do they do differently? Are these behaviors hardwired in an individual’s psyche, or can they be learned? In this provocative book, psychotherapist Dr. Charles Richards provides unexpected and encouraging answers to these questions. Based on his research and expert interviews, Dr. Richards shows how each of us can develop a thriving relationship with money and create a rich and rewarding life.

Your Best Just Got Better: Work Smarter, Think Bigger, Make More - In Your Best Just Got Better, productivity expert Jason Womack teaches readers that working longer hours doesn't make up for a flawed approach to productivity and performance. Workers need to clarify their habits, build mindset-based strategies, and be proactive. Womack's signature "workplace performance" techniques offer specific strategies to consistently and incrementally improve performance.

Resume 101: A Student and Recent-Grad Guide to Crafting Resumes and Cover Letters that Land Jobs - For two decades, communication professor Quentin Schultze has been teaching résumé-writing to college students and recent graduates, helping them identify their strengths and transferable skills from their unique life experiences--from extracurriculars to part-time jobs to internships to volunteering. With Résumé 101, you’ll discover the secrets to composing strong, impressive resumes and cover letters.

How to Become Filthy, Stinking Rich Through Network Marketing: Without Alienating Friends and Family - This is a book about reality—an unpleasant reality that no one seems to want to address. A large number of the population was hit with substantial loss of income and savings during the recent economic meltdown. Many feel that they have no way to build back their savings in order to retire comfortably and securely. Many now believe that there just isn't enough time left to turn it around. How to Become Filthy, Stinking Rich Through Network Marketing is for those who refuse to accept this nonsense.

FYI, some of these could have my handwritten notes in them and/or are old books of mine, so if you eventually win the set, don't expect completely new books.

A great résumé “sells” your potential, based on your past experiences and achievements. Remember that employers usually have to consider the likely future benefits of hiring you over any other applicant. What’s in it for them if they hire you over someone else? Your résumé gives you a chance to leverage your life experiences, to highlight what you can contribute to an organization’s (and your supervisor’s) success. Employers who review your résumé are looking for the kind of person who will make them look good. They care about the whole you, not just about one or another skill you may possess. If they don’t, you might not want to work for them anyway. Their company is probably not the kind of place that will help you transform a job into a career.

The secret behind every great career seeker’s résumé is relevant persuasiveness. Both knowing what to include in a résumé and how to express it are critically important. Your job is to include those entries that will highlight three relevant things about you. These are what I call the “big three.” Memorize them now. If you need a memory aid, try “SKiT.” These are your “lines” for your own résumé skit:

1. Your skills (what you can do)

2. Your knowledge (what you know)

3. Your traits (your personality, the kind of person you are)

Throughout this book I’ll show you how to develop a terrific résumé based on these three foundational elements. For now, remember that skills, knowledge, and traits are distinct, though related. Avoid thinking only in terms of the first category, skills. A dozen job applicants might have the same skills, but only one of them might know why and when to use a given skill—the latter person’s knowledge is a critical advantage. Moreover, perhaps only one applicant possesses the right traits to apply the skills and knowledge while working with particular kinds of people in a specific type of organization. Combined with even basic skills or knowledge, personal traits can be especially relevant and particularly persuasive.

The big three aspects of your life story—your skills, knowledge, and traits—are the keys to transforming your life experience into a standout, interview-generating, career-opening résumé. Why? Because every employee is a person, not just a worker. And because employers seek employees who have the right combinations of skill, knowledge, and personality. Employers ask themselves: “What can this person do for us?” “What does he or she know?” “Is this the type of person we want to work with—or who will interact well with our clients or customers?” “Does this applicant offer life knowledge and a winning -attitude—not just the desired skills?”

While I’m writing this book, one of my closest mentors is trying to decide what to do about two of her highly skilled but hopelessly critical employees. She’s been dealing with these two naysayers for over a year. They’re continuously bad--mouthing colleagues, gossiping about office politics, and challenging their supervisors’ decisions. Yet they are really talented at -working with customers. Yesterday my mentor became my mentee; she asked me for advice about what to do with these two misguided employees, even though I know very little about her business and even less about the skills required for doing the work well. I do, however, have experience working with people with all kinds of personality traits. My advice? Kindly show those two employees the door so that they can apply their skills and employ their vast store of knowledge in the right kind of setting. Help them find a more fitting career position. Then everyone will be happier. Square pegs can never be retrofitted for round holes.

Both the organization and the two employees are being poorly served by the current matchup. The employees gossip about colleagues and undermine the company because they’re unhappy, frustrated, and stressed out. They feel as though they have to make others look bad so they can look good—even though they’re remarkably talented. They would probably flourish in a setting with less stress and less emphasis on teamwork. Well, that was my advice about these troubled and troubling employees—again, even though I wasn’t qualified to address their career-specific skills and knowledge.

Most organizations today recognize that the big three are all critically important in the interviewing, hiring, and employee-review processes. Résumé writers who persuasively address all three stand a much greater chance of being taken seriously as viable candidates. We all serve others with our whole selves, not just with our skills or our knowledge or our traits.

All else being equal, these three keys, when matched with the right organization, will open the door for interviews. There are simply too many “equals” out there for you to ignore the reality of “whole person” (holistic) hiring. Imagine all of the college students who have similar degrees from similar schools, where they have lived in similar dorms, sipped similar types of coffee in order to stay awake in similar classes, earned credit for similar internships, joined similar student organizations, and achieved similar grades. As a career seeker, whether or not you’re a college student, you need to set yourself apart from the “similar” pack with an outstanding, personal, life experience–based résumé. You need to persuade via your knowledge and traits as well as your skills.

In some situations, knowing how to gain skills is more important than already possessing specific skills. Why? Because organizations occasionally assume that it will take more time and effort to retrain a new employee than to train them from scratch in particular ways to use those skills. For years, I helped former students shift from newspaper advertising copywriting to broadcast media copywriting. It was almost always the same issue for radio and TV media: could someone trained in print writing also write for the TV “eye” or for the radio “ear” (the “theater of the mind”)? Some accomplished newspaper writers could make the shift. Others never could.

Then the Internet came along and created some wonderfully mind-expanding, skill-transferring, career-building opportunities for people from all of these media (including skilled writers who were also closet “techies” with a love for computer programming).

A skill is never just one skill. It never has been. Economies and jobs change. Skilled people adapt. Wise employers know which skill sets to look for that might transfer well to emerging positions in new types of work. Skills morph.

But one essential skill in almost all of work and life is the ability to put yourself in someone else’s shoes—to see reality through another person’s eyes, to become skilled at one specific character trait: empathy. In fact, writing a career-launching or career-changing résumé is partly an act of empathizing with potential employers. From the very top of the résumé, the very first line, you need to demonstrate your ability and desire to put yourself in the shoes of the person who will be receiving your résumé. So it’s important to know who those people might be, from those helping you with networking to potential employers.

Here's another piece (this time from Yahoo) from a person who makes a $100k annual income and says it's not all it's crackled up to be. This one isn't as outrageous as our last guy (who couldn't make it on $350k a year), but the mere fact that "makes $100k" and "feels poor" is even in the same conversation is strange.

Here's a brief summary of their financial situation:

The couple purchased a house at the height of the boom, before the housing bust. It doesn't seem like they stretched too far to buy it (it was a $183k house, owe $1,200 a month on the mortgage, and have enough to pay $250 extra on it each month), but they are left paying for a home worth far less today than what they paid for it.

They have two kids in college. This is a financial killer and from what I'd guess, the main source of why things feel tight for them. They probably make enough not to qualify for aid but not so much that it's easy to afford college. And if they didn't save up in advance (I don't know if they did or didn't) then this puts them in a tough spot.

Other expenses: $500 a month on gasoline and $1,000 a month on food. $350 a month for utilities, $300 for car insurance, $175 for Internet, cable and phone. $300 on a car loan. No other debt. Save 10 percent of income for retirement. $15k per year on college costs -- just for a community college -- which will soon more than double. Then there are taxes, of course.

So here's a rough annual budget for them:

Income: $100,000

Taxes (federal, no state income tax in Florida, and real estate): $20,000 (guess, they just say it is "high")

Mortgage (including extra $250 per month): $17,664

College costs: $15,000

Food: $12,000

Retirement Savings: $10,000

Gasoline: $6,000

All others noted above: $13,500

Amount left over for all other spending: $5,836

They have less than $6k left over to spend on clothing, vacations, eating out, gifts, giving, house repairs, and on and on. I can see how it feels tight. I'm not sure what they are going to do when the college costs double...

That said, the question she poses seems outrageous. She asks, "Is six figures the new minimum wage?" The vast majority of Americans would laugh at this thought.

But things are tight. Sure they could do this or that, but there doesn't seem to be much wiggle room in their budget. But how CAN'T there be wiggle room? So many people make so much less than this (the average income is HALF what they make) and somehow they make it. What gives?

What would you do in their situation? Do you think they have plenty coming in and that it's just an expense problem or is it honestly hard to make it on $100k these days? Let me know your thoughts.

Here are the last two posts of Free Money Finance March Money Madness (to follow all the action click on my March Money Madness category link and scroll down to read all the posts involved in this subject.)

I've listed each "game" (one post versus another) in segments along with the wording provided by the author when the post was submitted. I've also listed a keyword after each post title to make it easy to vote (as a made-up example, you can just comment: Game 1: Saving; Game 2: Investing, etc.) Be sure to comment which one you like the best out of each set of two -- you will help determine the winner! Criteria for the best article is somewhat subjective, but you can use these factors as a guide: 1) practicality of the post 2) how interesting/provocative/unique it is, 3) the "personal-ness" of it and 4) its impact on net worth.

Here is the final (championship) game:

Living Well on Less Than $10,000 a Year: Habits of Skilled Visa Workers (Skilled) - This is an unusual tale of living under $10,000 a year. The high skilled visa workers while staying in US live extreme frugal life to save money for future, a future they'll live in their home countries. The article talks about this community and their practices, to motivate you towards saving.

VERSUS

Violating a Personal Finance Rule: I Just Bought a NEW Car! (Car) - Normally, I'd buy a used car. However, I broke this "rule" of personal finance recently in order to get what I REALLY wanted. This post is about why sometimes it's better to weigh the options, and do what works for you -- instead of going by a rule of thumb.

A group of our advisors attended a conference this past fall sponsored by Dimensional Fund Advisors. In his talk, "Risk Dimensions of the Market," Eugene F. Fama reviewed the latest data on the Fama-French three-factor model for investment returns.

Modeling investment returns seeks to find an equation to predict your expected returns as much as possible. The simplest equation for the markets would be "Return equals 11.71%." This has been the average return from 1927 through 2010, the zero factor model. Put your money in the market, and you will get, on average, 11.71% annually.

The one-factor model, called the capital asset pricing model (CAPM), was developed in the early 1960s. William Sharpe, Harry Markowitz and Merton Miller won the Nobel Prize in economics for this work. CAPM adds a single factor to the equation: risk as measured by standard deviation.

CAPM claims that the riskier the stock, the greater its expected return. Historical analysis provides evidence of how much. The CAPM formula says that the 11.71% returns of the market are actually a risk-free return of 3.67% plus a premium of 8.04% that investors require to take the risks in an inherently volatile stock market.

CAPM goes on to state that although the average premium for investing in the market is 8.04%, the premium is higher on more volatile stocks and lower on less volatile stocks. In other words, investors demand and receive a higher expected return for more volatile stocks. The sensitivity of a stock to market volatility is called "beta."

The beta of a stock measures the likely movement of a specific investment against the actual movement of the market. If the x-axis is the movement of the market and the y-axis is the movement of a specific investment, a line can be graphed of the average for all the movements of the market and the corresponding movements of a specific investment. The formula for the expected return of an investment is the risk-free return plus the stock's beta times the risk premium.

For example, a stock with a beta of 2.0 will go up twice the market premium when the stock market goes up. But it will go down twice as much when the market goes down. Because the market generally trends upward, this stock has a higher expected return. A stock with a beta of only 0.5 will be less volatile but also have a lower expected return.

Individual stocks do not follow these trends exactly. They are only aggregate trends. The more heavily diversified you are and the longer you are invested in the markets, the more your experience will coincide with market averages. But the general idea that systematic risk and average return go together is the important lesson for investing.

Three caveats to note. Systematic risk is undiversifiable market risk. Many investment schemes involve specific risks that can and should be avoided. Also, typically the market is measured by the S&P 500, which ignores the fact that this index only represents a portion of the investable markets. Finally, your experience of market returns is diminished by the fees and expenses of your investment vehicles. Hidden costs are often a significant drag on your specific portfolio investments.

There is no such thing as a safe investment that pays market rates of return. Safe investments average 3.67% annually. If you want the other 8.04%, you must be willing to put your money at risk. You can and should be prudent, but there is no guarantee that you will get all your money back. The general principle is that risk follows return.

CAPM is the one-factor model for investment returns. In future articles we will add two more factors that help explain more of the variance of specific investments against general market returns. In the meantime, we learn from CAPM that the markets are inherently volatile but also very profitable. Historically, the market has paid a premium for risk. And although we cannot avoid systemic risk, we can steer clear of specific risks and high fees and expenses.

April 10, 2012

The following is a guest post from Steve at Money Infant. Steve is an early semi retired guy living in Thailand and blogging about personal finance from the perspective of someone who values experience over material things.

Once you are semi retired there are a whole slew of possibilities that open up to you. This is especially true for those who choose early semi retirement because you are likely to have more energy and enthusiasm. In fact, it is these opportunities that often make people choose early semi retirement over continuing in their full time employment. Often there are trade offs involved, especially in your finances, but the world of opportunities can be the deciding factor.

If you are considering early semi retirement, here are 6 things you can do with your new found freedom:

Travel - Most of us love to travel, but with a full time job you are likely limited to 4-5 weeks a year at the most to indulge yourself in this particular form of pleasure. Not so when you choose early semi retirement. The world becomes your oyster and you can choose among the millions of travel options and destinations available to you. Whether you like short trips close to home, longer vacations in far off destinations or even if you yearn for the life of an expatriate (as I did) you can realize your travel dreams once you are semi retired.

Hobbies - Most of us have a hobby of some sort, whether it be woodworking, gardening, reading or playing with computer hardware or software. Once you become semi retired you will have enough time not only to pursue your favorite hobby, but also take up new ones that you may have put off because of the lack of time. And depending what your hobbies are you might even decide to find a way to profit from them, combining work and play and profiting from your passions.

Spend time with your family - This is one of my favorites. I have two older boys and I missed much of their younger years because of work committments. Not so with my 21 month old daughter. I get to spend as much time with her as I like and watch her development on a daily basis. Not to mention the increased time I have with my wife. Our marriage is much more rich and our relationship is closer than ever thanks to my being present on a daily basis. If you have loved ones that you want to get closer to there is no better way than to grant yourself the freedom to do so by becoming semi retired early in your life.

Write a book - It is said that everyone has at least one story in them worth telling. Why not express yourself in the written word by writing a book? There are only limited ways to gain immortality and becoming an author is one of them. Once you pen and publish your words they will be around for countless future generations to benefit from and enjoy. Who knows what influence you might eventually have?

Go back to school - Maybe you never had the chance to finish your degree or perhaps you've considered taking up a new career. Early semi retirement opens up the possibility for you to resume your studies or to branch off in a completely different direction if you like. Don't think you are too old because there is always a way to teach an old dog new tricks!

Volunteer - Now that you have more time available to you it might want to use some of it by giving back to your community. There are all sorts of volunteer opportunities from helping in soup kitchens to traveling overseas and assisting in less developed countries. Depending on your skill set you could make a huge difference. Those in the medical and engineering fields are always welcomed in overseas projects. And everyone is welcomed in those projects closer to home.

I think this list just scratches the surface of the opportunites that become available once you take an early semi retirement. The choices are only limited by your own interests and imagination. Let me know in the comments about some other early retirement options you may have thought of or are considering.

It's FMF this time, asking for another round of vacation advice. You all were so helpful when we took our cruise earlier this year that I thought I'd ask for your input again.

After a great cruise experience, we want to return to the Caribbean this winter, but this time we'd like to skip the cruise and focus on one (or a few islands.) In addition, here are a few things you might want to know that will help you give us good advice:

The trip will include at least our entire family (two adults and two teenagers.) We may have a few other family members along as well, but we can't be sure at this point.

We like activities like swimming, sailing on catamarans, driving wave runners, riding zip lines, really anything that involves being out on the water.

We do not drink alcohol and are not the "party type."

As such, here are our questions:

Which Caribbean islands would you recommend? What's so special about the ones you like? There are so many great islands and we have our favorites, but I'd like to hear from you on the ones you like best.

Anyone had experience with all-inclusive resorts? Did you like them or not? Since we're not drinkers, will we miss out on a big benefit of going to one?

How easy is it to get from one island to another? If we want to spend three days on three different islands, what's the best/easiest way to do that?

Are there any special places, activities, event we should be sure to consider?

Is there a resource (or a few) to rent condos on the islands? If we have a larger group, we may want to consider one.

What time of year is "best" to visit the Caribbean? I know that's a subjective question, but I'm sure there are those reading this who have opinions.

We've started our research by ordering books from the library and googling around a bit, but I wanted to be sure and ask you all since I know you're full of wisdom on this subject. Please tell us what you know/think -- we'd sure appreciate it!

April 09, 2012

The following is the latest post in my "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.

If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going.

Next in the series is FMF reader DR. He answered my questions (in red below) as follows:

Please tell us a bit about yourself.

I am a 22-year-old male, married, with a 1-year-old daughter.

Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.) and what are the current financial issues you're facing (saving, paying off debt, etc.).

Before my daughter was born last year, my wife and I both worked part time while going to school. We made a decision then that my wife would be a stay at home mom; essentially banking on me being able to land a full time job when I graduated last May. Fortunately, everything fell into place for us and I landed my current job about a month after graduation.

Our current monthly income (net) is $4000; this is after maximizing my employer's 401(k) contribution and maxing out my flex spending account for the year (I decided to get braces and this was the most cost effective way).

Expenses are as follows:

Debt Repayment - $1250*

Rent - $1000

Family Allowance - $350**

Groceries - $300

Utilities - $250

Phone Bill - $240***

Gas - $200

My Allowance - $150

Wife's Allowance - $150

DirecTV - $50

Internet Service - $60

We try to to put as many of these expenses on our credit card(s) (using the Blue Cash Preferred / Chase Freedom combo to maximize CB rewards)

*Our debts: We have approximately $47000 in student loan debt and $3000 left on a used car loan at a horrible interest rate (14.99%). the original loan amount was ~11000, but we have worked it down and will finish paying it off by August. With the amount we are paying on our debt, we are projecting being debt free by March 1, 2016. Assuming all else stays the same.

** Family and individual allowances: Originally, We planned to throw $1600-1700 per month at our debt in order to have them paid off in just under 3 years, instead of 4. However, we couldn't justify leaving absolutely nothing for "fun" money. Our personal allowances are just that, personal. We both get $150 per month to spend on anything, lunches (pack mine 99% of the time), booze (rarely drink, maybe once in the last year), etc, no questions asked. The family allowance is for misc family expenses and weekend trips (we live in a small town now, so once or twice a month we like to travel to the nearest large city (~2 hours) and visit some sort of attraction. We intentionally set this up to exceed the amount we will really spend each month in order to keep better track of our misc savings on Mint.com using rollover budgets on the allowance categories (saving for insurance premiums, paid every six months, and other such events).

*** Phone Bill: My parents recently went through a divorce and in order to help my mom a little bit we helped them cancel their phone contract with T-mobile ($200/month) and added her and my sisters onto our account, I figured it only cost me another $40 and saved them over $200. Worth it, IMO.

This is our first month trying out this revamped budget. For the last 8 months we had been keeping track of our spending in kind of a dumb way. We were relying on money coming in at the end of the month to pay off expenses incurred at the beginning of the month. While the numbers worked just fine at the end of the month, it caused some stress seeing our checking account balance dip so low while seeing our credit card balance get so high right around the 25th of each month. We scrapped that approach and now for every dollar we spend on the credit card there is a corresponding dollar in our checking account. Much easier.

Obviously this is still a work in progress, but I think we're headed in the right direction.

What are your plans for the future (retire early, build your career, etc.)?

Financially, our first priority is to get out of debt. At the very latest, this should happen in 4 years. After that, we want to increase our emergency fund from $1000 to $15000. So in five years we want to be debt free and have a fully funded emergency fund. This is where is will get interesting, because I do not know if we will want to stay where we currently are for the long haul. In five years we will be out of debt and have a fully funded emergency fund, AND I will be fully vested in my employer matched contributions to my 401(k) and pension plans. I have spoken with my wife and we both want to get back to our home town at some point, I figure that would be the best time to at least look into doing it.

Once we are out of debt we want to begin maxing out Roth IRA's for both of us as well as saving for college for our daughter. I want to give her the opportunity to do whatever she wants, not to just look into a career for the money (on that note, I like what I do and I am good at what I do, but it is not something I am passionate about. Perhaps when we are debt free I will reevaluate my career path).

Aside from the immediate future, it is hard for me to really say what I hope to accomplish. I mean, 5 years ago I wanted to become a video game tester and live with my parents until I was 30... I do know that I will strive to do what is best not only for myself, but for my family, and the first step is to achieve and maintain financial security.

Here's a story a reader emailed me recently that he wanted to share with FMF readers:

We bought our house in 2000 for $217k, putting down $90k from the profit we made on our other house and taking out a $127k 30-year mortgage. I paid some additional principle on but nothing too much. If the mortgage payment was $1235 I would add either an additional $65 or $165 to make it a nice round number. Some months I just did not do it. After 4 years (with a balance of $115k) I had the opportunity to refinance at a lower rate for the same amount of mortgage payment but for a 15-year mortgage. Since I knew I would be paying more toward the principle each month, this encouraged me to pay down the principle even more. This was 2004, and all the pundits and gurus of Wall Street were saying don’t pay down the mortgage but invest that money in the stock market. Umm yeah.

Well I kind of did both for a while until I came across FMF. Finally someone who said it was OK to pay off your mortgage ASAP. So this encouraged me and I upped the mortgage payment by to around $1500 to $1750. This allowed an extra $250 to $500 more per month applied to the principle. I remember for a while I tried to be in the area of adding to the principle mortgage payment what was being applied from a normal mortgage payment.

When things were getting shaky in 2006 the financial market with the sub-prime debacle I said let's pay even more toward the principle so now I was up to $2000 to $2500 but also up my cash reserves. I was still investing money to save for my kids’ college education but I did not trust the stock market as much. Then in 2007 all heck broke loose and that is when I said I am still going to keep up the pace of trying to pay off the mortgage or even a little more and also cash.

In the year 2010 I needed to do my first FAFSA for financial aid for my son. They ask you to list all assets that could be used for college. Well having a 529 plan, stocks, mutual funds and CD’s, our Expected Family Contribution (EFC) was twice the amount that it would actually cost to send him there. This would mean that there would be no subsidized loans or grants or anything. That was OK but the kid had some money (but not enough to send himself to college.) It was because of the assets that I had. This is when I realized that these assets that I have are actually a hindrance to him getting any financial aid other than an unsubsidized loan at 8% interest which would start charging the day you sign the loan. Ugh! So I took some of these assets that the FAFSA said I could tap for college and started to be even more aggressive in paying down the mortgage. Even with taking some of these assets to pay down the mortgage VERY aggressively our EFC is only $4k less than last year.

This April first I will have paid off my 15 year mortgage in 7 years 9 months. Now I will be now able to save that money that was going toward a mortgage payment and continue to applying it to our Roth IRA's and college savings. In another year our other son will be starting college and having the mortgage paid off is a nice relief having the mortgage gone. Depending on where our sons want to go to college they will not be strapped with a boatload of debt when they get out.

A few comments:

Notice how he paid down his mortgage AND continued saving/investing? I did that too. If you have a large enough gap and buy a house you can afford, you don't have to sacrifice saving when paying down a mortgage.

Yep, I'm going to get killed on the FAFSA too. I know my kids won't be getting any aid (other than potentially academic) since our asset levels are high. Good thing we have the money saved for them.

Recently the people at Fiverr, the site where people offer to do tasks for $5 a pop (though the good sellers add on services costing way more than $5), asked me if I wanted to highlight some success stories from their site. Since I love "how to make money on the side" pieces, I told them I'd love to. So here's what they sent me -- five stories of how people use Fiverr to make a decent side income.

$4k on Impressions

Seller Name: Chris Hardy

Seller Description: Repairs school band musical instruments by day, Voice impressionist by night

Fiverr handle: Chrishardy

Fiverr Profile: http://fiverr.com/chrishardy

Gig (s) Offered: Standard voice over gigs, writes set of song lyrics, will sing name in four part harmony and more for $5

Story: By day, Chris Hardy works at Guitar Center repairing musical band instruments. He first heard about Fiverr from the Clark Howard show which featured Fiverr as a great tool to earn extra cash and immediately began thinking what his talents were. As music has been an integral part of his life, he decided to use his musical talent and couple it with his voice over impressions to sell songs for 5 dollars. Chris uses the money he earns from Fiverr to supplement his wife’s college expenses like books.

Quote: “I just cleared the $4,000 mark and I started in September 2010. It seems like a constant stream of money is going into my PayPal account.”

$10k in Puppet Videos

Seller Name: Mark Gray

Seller Description: LA producer cashes in with Professor Puppet alter ego – earning nearly $10,000 in less than a year

Fiverr handle: professorpuppet

Fiverr Profile: http://fiverr.com/professorpuppet

Gig(s) Offered: Will record a custom video of anything you like for $5

Story: Rocket Pictures production company founder Mark Gray has more than 22 years of experience in the entertainment industry. He first heard about Fiverr through a colleague and immediately saw the opportunity to harness its power to make a little side cash. After creating the “professorpuppet” user name, he posted his offer to the site, “Prof. Hans Von Puppet, brilliant scientist and web'lebrity, will record a custom ~30 second video for you… Happy Birthday, comment on your blog, advertise your product – anything.”

Quote: “I was enthusiastic about using the site, but the results far exceeded my expectations,” said Gray. “In just eight months, I’ve created more than 1,500 professorpuppet videos and made nearly $10,000, an incredible help in the unstable entertainment industry.”

Coffee Photos FTW

Seller Name: Sarah Schubert

Seller Description: Aspiring Actress turned Web Celeb

Fiverr handle: sarahsunshine

Fiverr Profile: http://fiverr.com/sarahsunshine/

Gig(s) Offered: Will photograph a custom coffee bean creation for $5

Story: An aspiring actress and disgruntled publishing industry employee, Sarah Schubert found herself unable to break into the competitive acting world. When a friend tweeted about Fiverr, Sarah jumped on the opportunity to bring in supplemental income, allowing her to focus on her passion: acting. Schubert, similar to many L.A. residents is a jack-of-all-trades and offered a variety of services from photography with coffee to video testimonials to android application ratings. Sarah has sold more than 500 gigs on made more than $2,000. More importantly, Fiverr gave her the flexibility to build an online brand, ultimately allowing her to launch her acting career. Since becoming popular on the site, Sarah has appeared in various music videos and a handful of short-length films.

$7k in Graphics

Seller Name: Mary Ingrassia

Seller Description: Freelance graphic artist

Fiverr Profile: http://fiverr.com/uniquefivex

Gig (s) Offered: I will speed color your logo for $5 – biggest seller – people would make it an ad for their website, put it on their Facebook page – lots of sales on that – that’s what she’s been doing the most of now – edits it to speed it up, then puts music and fades to logo

Story: Mary is a freelance graphic artist who was looking for work as the economy hit bottom. She first heard about Fiverr a year ago from a Yahoo News article and realized she could see her designs for Five dollars. She offers upgrades – “gig extras” – lots of people add it - $10 for a faster turnaround time, speed write 3 pages before coloring in the logo (people say what they sell, etc.), for a more complex logo (with a character, there’s more color, etc.) charge more. So far she has made over $7,000 and it’s a consistent source of extra cash.

Social Media for $5

Seller Name: Matt Wayne

Seller Description: Sales and online marketing

Gig(s) Offered: Gets Twitter or Facebook followers for $5

Story: Upper West Sider Matt Wayne, founder of a company called No Social Limits, has generated over 1,000 orders over the past few months for $5 services that include boosting clients’ followers on Twitter or YouTube and friend counts on Facebook. He’s now offering larger-scale services that he hopes will turn those micro-gigs into an actual client base.

Quote: “If they like us at $5, we can then convert them up to a $20 sale, which makes it more worth my while,” said Wayne, 25, who currently fields up to 20 orders a day on the site. “People thought I was crazy,” he said. “It was $4 in revenue. But money is money.”